On May 15, 2009, the Internal Revenue Service (IRS) issued proposed regulations that permit sponsors of 401(k) and 403(b) safe harbor retirement plans that experience a substantial business hardship to suspend or reduce safe harbor nonelective contributions mid-plan-year rather than terminate their plans. The proposed rules parallel existing regulations that allow sponsors of safe harbor matching plans to suspend or reduce matching contributions as an alternative to terminating the plan.
The proposed regulations apply to both traditional safe harbor nonelective contributions and safe harbor nonelective contributions under qualified automatic contribution arrangements (QACAs).
To take advantage of the new rules, a plan sponsor must first determine that it has incurred a substantial business hardship. The occurrence of a substantial business hardship depends on a number of factors, including whether the employer is operating at an economic loss, whether there is substantial unemployment/underemployment or declining sales and profits in the employer’s industry, and whether it is reasonable to expect that the plan will be continued only after the planned reduction or suspension of contributions.
The plan sponsor must also comply with certain notice and timing requirements, including the adoption of a plan amendment and notice to participants at least 30 days prior to the suspension or reduction of contributions. As a result, plan sponsors cannot wait until the end of the plan year to implement this change. The plan must satisfy the safe harbor nonelective contribution requirements for the portion of the year prior to the suspension or reduction of safe harbor nonelective contributions, and must satisfy the ADP and ACP tests using the current year testing method for the entire plan year. In addition, plan sponsors should consider that the plan will no longer be exempt from top-heavy testing and minimum contribution requirements.
Plan sponsors may rely on these proposed regulations immediately. If more restrictive regulations are adopted in the future they will not be applied with retroactive effect.