401(k) Plan Mid-Year Reduction or Suspension of Safe Harbor Contributions: What Can Employers Do?
Over the past several years, many employers have adopted a safe harbor contribution feature for their 401(k) retirement plan. Employers anticipating or experiencing financial stress triggered by the COVID-19 related business disruptions may now want to reduce or even suspend the safe harbor contributions. The decision to reduce or suspend employer contributions mid-year, and how to implement such a decision, should be carefully considered. The following is a summary of the procedures required for reducing or suspending a safe harbor contribution and the implications for both the employer and the plan.
Safe harbor contributions are fixed matching contributions or nonelective contributions that an employer must make to its 401(k) plan and which allow the employer to forego annual nondiscrimination and top-heavy testing of the plan. Generally, the employer safe harbor contribution must be in place for the entire plan year. However, the safe harbor contribution may be reduced or suspended mid-year if the employer either:
- Is operating under an economic loss (as defined in IRC 412(c)(2)(C), which generally means its expenses exceed income for the year); OR
- Included a statement in its annual safe harbor notice given to participants before the start of the plan year that the employer: (i) may reduce or suspend contributions mid-year; (ii) will give participants a supplemental notice regarding the suspension; and (iii) will not suspend the employer safe harbor contribution until at least 30 days after receipt of the supplemental notice.
In either case, the employer must give participants a supplemental notice that explains:
- the consequences of the reduction or suspension;
- how participants may change their deferral elections; and
- when the plan amendment suspending or reducing the match or non-elective contribution takes effect.
The notice should include a statement that participants may change their deferral elections during the period before the amendment is effective. The reduction or suspension may not occur until at least 30 days after the later of the date the plan is amended, or the date the notice is provided. The amendment must be prospective and any safe harbor contributions accrued before the amendment takes effect must be made to the plan. In addition, the plan becomes subject to top-heavy testing and, therefore, the employer may be required to make a top heavy minimum contribution at the end of the plan year for all non-key employees. The top-heavy minimum contributions, if required, could be more than the safe harbor contributions! Accordingly, it is important to do an economic analysis to determine whether suspension of the safe harbor contribution makes financial sense.
Employers should note that failure to timely make any safe harbor contribution for a plan year, or failure to follow the requirements outlined above for reducing or suspending the safe harbor contributions, may jeopardize the tax-qualified status of the plan. The participants or the Secretary of the Department of Labor may bring suit to enforce the safe harbor contributions and may bring a claim for breach of fiduciary duty for failure to administer the plan in accordance with its terms. Late contributions must be adjusted for lost earnings from the date the contributions should have been remitted to the plan through to the date of the contribution.
Retirement industry groups are currently lobbying legislators to temporarily ease the safe harbor suspension rules during the economic disruption due to COVID-19. Of course, it is possible that Congress does not view this as a high priority under the present circumstances. Therefore, employers that want to reduce or suspend their safe harbor contribution should adopt the necessary plan amendments and issue a supplemental notice to participants as described above as soon as possible.
Finally, we remind employers that both the Internal Revenue Code and ERISA protect certain plan benefits by prohibiting an employer from reducing, eliminating, or making subject to employer discretion certain rights with respect to the participant's “accrued benefit.” Generally, this means an employer may not reduce or take away a benefit once a participant has satisfied the allocation conditions, unless an exception applies, such as the safe harbor suspension rules described above. Employers with concerns about their ability to fund retirement plan benefits should consult with legal counsel.
Pullman & Comley Employee Benefits attorneys are available to answer inquiries regarding this and other workplace developments.
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