Posted by Saaib Uppal, CPA
As discussed in one of our previous blog entries, the IRS updated its regulations in 2009 to allow for the reduction and/or the suspension of safe harbor non-elective contributions if certain situations are in play.
But, what should be the course of action for the employer who wishes to reduce/suspend a safe harbor matching contribution? It is actually the same process discussed in our original blog, less one requirement. The employer is not required to incur a “substantial business hardship.” The employer must still comply with these rules:
- The plan must be amended to provide that it satisfies both the ADP and ACP tests for the entire plan year using the current year testing method, regardless of the fact that safe harbor contributions were made for part of the year;
- All safe harbor contributions must be made, up until the effective date of the amendment;
- The reduction or suspension of the safe harbor matching contribution may not be effective earlier than 30 days after delivery to the eligible employees of a notice containing the information described below (or 30 days after the amendment is adopted, whichever is later);
- Eligible employees must be given a reasonable opportunity to change their existing deferral elections after receipt of the notice, but prior to the effective date of the amendment;
- The notice to eligible employees must contain an explanation of the following:
- The consequences of the amendments reducing or suspending future safe harbor matching contributions;
- The procedures for changing the employee’s deferral election and, if applicable, employee contribution elections; and
- The effective date of the amendment to the plan which suspends and/or reduces the safe harbor matching contribution.
Those employers who are looking for ways to reduce or suspend their contributions mid-year without terminating their plan should be sure to follow the above IRS regulations.