Internal Revenue Code Includes Restrictions on Reduction of Employer Safe Harbor 401(k) Contributions
In the face of trying economic times, many employers are looking for cost-cutting measures to maintain viability. Among these cost-cutting measures is a reduction or elimination of contributions to the 401(k) plans they sponsor.
While in most cases, employers are permitted to amend retirement plans to reduce future contribution requirements at any time during the plan year, employers that sponsor a Safe Harbor 401(k) plan should be aware that current regulations severely restrict their ability to reduce employer safe harbor contributions mid-year.
Generally, there are two types of employer contributions to a safe harbor 401(k) plan:
Depending on the type of safe harbor 401(k) plan that the employer sponsors, the method of eliminating the employer contribution varies dramatically.
The American Society of Pension Professionals & Actuaries has written the Internal Revenue Service requesting relief on behalf of employers nationwide that are concerned over their ability to maintain the 3 percent contribution required for certain safe harbor 401(k) plans. The Internal Revenue Service is being urged to issue guidance that would modify existing regulations to permit an employer to suspend 3 percent safe harbor contributions mid-plan year.
Clients that sponsor safe harbor 401(k) plans should be aware of the restrictions the Internal Revenue Code places on the reduction of employer safe harbor contributions as well as the relief available under current regulations. This is especially true for employers that have elected to adopt a safe harbor 401(k) plan with a 3% mandatory employer contribution.
In particular, for employers with a safe harbor 401(k) plan with a 3% mandatory employer contribution, termination of the plan is the only mid-year relief available. However, plan sponsors have the following options to affect required contributions is future plan years:
Not all 401(k) plans are created equal, so the details of a specific client’s situation are extremely important for any analysis.
The Employee Benefits Consulting group is prepared to assist clients in making decisions related to safe harbor 401(k) plans as well as preparation of plan amendments or termination if necessary.
While in most cases, employers are permitted to amend retirement plans to reduce future contribution requirements at any time during the plan year, employers that sponsor a Safe Harbor 401(k) plan should be aware that current regulations severely restrict their ability to reduce employer safe harbor contributions mid-year.
Generally, there are two types of employer contributions to a safe harbor 401(k) plan:
- Matching Contribution – the first is a tiered matching contribution of up to 4 percent of a participant’s eligible compensation (contingent on the amount the participant contributes);
- Mandatory Employer Contribution – the second is a mandatory employer contribution of 3 percent of eligible employee compensation (this type of contribution is also known as a nonelective contribution).
Elimination of the Safe Harbor Contribution during the Plan Year
Depending on the type of safe harbor 401(k) plan that the employer sponsors, the method of eliminating the employer contribution varies dramatically.
- Matching Contribution – Current regulations permit employers that offer safe harbor matching contributions to reduce their matching percentage at any time during the plan year through a plan amendment, provided notice is given to affected employees and the matching contribution is provided for compensation earned prior to the effective date of the amendment. However, certain nondiscrimination testing requirements will apply.
- Mandatory Employer Contribution – On the other hand, termination of the plan is the only relief available to employers who determine mid-year that they are unable to make the required 3 percent employer safe harbor contribution. An employer that terminates a 401(k) plan is required to wait 12 months after all assets have been distributed before another 401(k) plan can be established. If the employer provided proper participant notification before the plan year started that the contribution is discretionary, the contribution may not have to be made.
The American Society of Pension Professionals & Actuaries has written the Internal Revenue Service requesting relief on behalf of employers nationwide that are concerned over their ability to maintain the 3 percent contribution required for certain safe harbor 401(k) plans. The Internal Revenue Service is being urged to issue guidance that would modify existing regulations to permit an employer to suspend 3 percent safe harbor contributions mid-plan year.
What Should Clients Be Aware Of?
Clients that sponsor safe harbor 401(k) plans should be aware of the restrictions the Internal Revenue Code places on the reduction of employer safe harbor contributions as well as the relief available under current regulations. This is especially true for employers that have elected to adopt a safe harbor 401(k) plan with a 3% mandatory employer contribution.
In particular, for employers with a safe harbor 401(k) plan with a 3% mandatory employer contribution, termination of the plan is the only mid-year relief available. However, plan sponsors have the following options to affect required contributions is future plan years:
- plans can be amended to provide that the employer may make a safe harbor contribution. Under this approach, employers have until 30 days from the last day of each plan year to determine whether they will make a safe harbor contribution for that year. Certain increased notice requirements apply, but this method provides employers with invaluable flexibility from year to year and allows some level of retrospective decision-making.
- plans may also be amended to reduce or eliminate employer contributions for future plan years; however, a blanket reduction or elimination will effectively remove all safe harbor provisions and a new amendment would be required if the employer wanted to return to the safe harbor design in the future.
Not all 401(k) plans are created equal, so the details of a specific client’s situation are extremely important for any analysis.
The Employee Benefits Consulting group is prepared to assist clients in making decisions related to safe harbor 401(k) plans as well as preparation of plan amendments or termination if necessary.
