Posted by Saaib Uppal, Staff Accountant
After weeks of internal deliberation and planning, I had finally gained the courage to ask a particular girl to my high school prom. I was very nervous and she replied with, ‘”Maybe.” What does that word mean? Is it a positive “maybe”? Is it a, “I don’t want to say ‘No’ since you’re my friend so I’m going to say ‘maybe’” maybe? Do I wait for confirmation either way before I ask another girl? These were some of the many questions that went through my mind from the word “maybe.”
Here I am 5 years later researching IRS regulations (How quickly we grow up!), and I believe I have finally figured out “maybe.” I believe that a lot of times when we use the word “maybe,” it is not due to uncertainty of our decision. Rather, we are aware of our present circumstances but would like to leave room to change our mind. An “opt-out” clause if you will.
Take the “maybe” notice that the IRS allows for employers, for example. This regulation allows an employer to retain flexibility over a safe harbor non-elective contribution. By distributing a “maybe notice,” an employer doesn’t have to commit to a safe harbor non-elective contribution. Depending on their economic and liquidity situations, they can amend the plan during the plan year to make a safe harbor non-elective contribution or choose to remain status quo. So what are the steps that an employer should follow to take advantage of the “maybe” notice? They are:
- Maintain a 401(k) plan;
- Provide a notice to the employees before the beginning of the year indicating that the employer may make a safe harbor non-elective contribution;
- If it decides to be a safe harbor 401(k) plan, provide a supplemental notice at least 30 days before the end of the plan year indicating that it will make a safe harbor non-elective contribution; and
- Amend the plan to provide a safe harbor non-elective contribution.
Employers have to be careful with the timing of their actions. The “maybe” notice only accommodates employers that anticipate their future circumstances before the beginning of the plan year. Until recently, any employer that encountered unexpected adverse financial consequences during the plan year had to terminate their plan to end the employer’s non-elective contribution obligation. In May of 2009 however, the IRS proposed regulations that allow for the reduction and/or the suspension of the non-elective contributions without the “maybe” notice, subject to regulatory conditions. I have gone into detail on those proposals and the required conditions in one of my previous blogs titled, “How to Stop a Non-Elective Contribution.” (Shameless plug!)
So whether it’s the girl you’ve set your eyes on in high school or your employer that is providing pension benefits, one should be prepared to receive a “maybe” answer to a future-changing question. Many situations can be fluid, especially those that involve liquidity and funding, so not every answer can be set in stone. It is important to be patient while waiting until a final decision can be made.
Photo By Jamakinthunda (License)
