Posted by Saaib Uppal, Staff Accountant
Webster’s dictionary defines a commitment as “an agreement or pledge to do something in the future.” What Webster doesn’t mention is anything regarding the length of that commitment or the procedures for an opt-out. Circumstances and factors often arise that make it difficult and even impossible at times to keep a commitment.
In employee benefits practices across the country, we are seeing the effects of the economic downturn when it comes to commitments such as safe harbor matches and non-elective contributions. Many employers are looking for ways to reduce or suspend these contributions mid-year. Until recently, the only way to stop safe harbor non-elective contrbutions after the plan year had started was to terminate the plan, which many employers did not want to pursue. A common reason employers would even contemplate breaking this commitment was simply due to liquidity issues while waiting for the economy to recover.
On May 18, 2009, the IRS proposed regulations that allow for the reduction and/or the suspension of safe harbor non-elective contributions for employers who experience “substantial business hardship.” The IRS stated that “…adopting the provisions in these regulation [sic] will in almost all cases save the small business owner money.” However, the fact is that the employer may not save any money at all by suspending the safe harbor non-elective contribution if the plan is top heavy. These proposed regulations will allow plan sponsors to amend their safe harbor 401(k) plan during the plan year. To take advantage of these proposed regulations, employers must comply with the following rules:
- The sponsor must incur a substantial business hardship which is defined as including (but not limited to) whether or not:
- The employer is operating at an economic loss;
- There is substantial unemployment or underemployment in the employer’s trade or business; and
- The sales and profits of the employer’s industry are depressed or declining.
- 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 non-elective safe harbor 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 non-elective 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 non-elective safe harbor contribution.
These regulations should be a relief for those plan sponsors who are experiencing liquidity issues. Nobody likes breaking a commitment but at times it is out of our hands. Employees should take solace in the fact that employers aren’t looking to terminate plans but rather reallocate funds temporarily Oftentimes, it is truly out of good faith and the initial commitments will be kept in the long run.