Compliance

IRS Revises Safe Harbor Plan Rules

By John Manganaro editors@plansponsor.com | November 15, 2013
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November 15, 2013 (PLANSPONSOR.com) – Revisions to the Internal Revenue Service’s (IRS) rules governing contributions to safe harbor 401(k) and 403(b) plans make it easier for struggling companies to reduce or suspend those payments.

The rule changes impact non-elective and matching contributions paid by employers to safe harbor accounts, which are designed to allow employers to circumvent the most difficult non-discrimination standards for qualified retirement plans so long as they make certain minimum contributions to all eligible employees, among other stipulations.

In short, the changes ease interim regulations enacted in the wake of the 2008-09 financial crisis to provide struggling businesses a way to reduce or suspend non-elective contributions in the face of “substantial business hardship.”

Before the IRS enacted the interim regulations, businesses had no way to reduce or eliminate non-elective contributions to safe harbor plans in the middle of a plan year. Matching contributions, though, could be cut or suspended at the mid-year point so long as 30-days’ notice was provided to plan participants.

The new rules, says Robert Kaplan, an associate attorney at Ballard Spahr LLP, are designed to alleviate confusion over what “substantial business hardship” actually entails. Under the new regulations, businesses can reduce or suspend safe harbor non-elective contributions at the mid-year point so long as they are operating at an economic loss and provide sufficient notice to employees.

“Before the new rules came out there was a bit of a problem, in that it was not clear exactly what a substantial business hardship was,” Kaplan tells PLANSPONSOR. “So only employers that were bankrupt or on the verge of going bankrupt felt comfortable using the provision. The new standard is more objective, because it’s obviously easier to determine if a company is operating at an economic loss than it is to say they have suffered a substantial hardship.”