Employee Benefits-IRS Amends Safe Harbor 401(k)/(m) Rules To Provide Guidance On Reduction Or Suspension Of Safe Harbor Contributions

On November 15, 2013, the Internal Revenue Service (the “IRS”) has issued an amendment to the safe harbor 401(k)/(m) rules to provide guidance on permitted mid-year reductions or suspensions of safe harbor nonelective contributions, effective for plan amendments provided for such a reduction or suspension adopted after May 18, 2009. The amendment also revises the requirements for permitted mid-year reductions or suspensions of safe harbor matching contributions for plan years beginning on or after January 1, 2015.

The highlights of the new amendment are:

–To reduce or suspend safe harbor contributions nonelective contributions, the employer must be operating at an economic loss as described in section 412(c)(2)(A) of the Internal Revenue Code. However, the employer may reduce or suspend such contributions without regard to its financial condition, if notice is provided to participants before the beginning of the plan year which discloses: (1) the possibility that the contributions might be reduced or suspended mid-year and (2) that a supplemental notice will be provided to participants if a reduction or suspension does occur and that the reduction or suspension will not apply until at least 30 days after the supplemental notice is provided.

–The rules that apply to mid-year plan amendments reducing or suspending safe harbor matching contributions are revised so that the requirements that apply to a mid-year reduction or suspension of safe harbor nonelective contributions are not stricter than (and can be the same as) those that apply to a mid-year reduction or suspension of safe harbor matching contributions.

— The reduction or suspension in safe harbor nonelective or matching contributions cannot be effective earlier than the later of the date the amendment providing for the reduction or suspension is adopted or 30 days after eligible employees are provided the supplemental notice. Thus, the minimum 30-day waiting period applies solely with respect to the date the supplemental notice is provided and not the date the amendment is adopted.