In May, the IRS proposed rules that would permit
employers affected by substantial business hardship to
decide mid-year to reduce or suspend safe harbor
non-elective contributions to 401(k) and 403(b) plans
IRS Opens Door for Safe Harbor
). What does this mean for 403(b) plan sponsors?
In order for a 403(b) plan (or 401(k) plan) to meet
nondiscrimination testing on a "safe harbor" basis, the
employer is required to make either a matching or
This is true whether the plan's safe harbor status
is based on the traditional safe harbor or the more recent
Qualified Automatic Contribution Arrangement design.
Generally, a plan's status as a safe harbor plan, and the
required employer contributions, must continue for the
entire 12-month plan year.
IRS regulations have long permitted an employer to
amend its "safe harbor" 403(b) plan (or 401(k) plan) to
suspend or reduce matching contributions mid-year, if
certain requirements are met, including 30-day advance
notice to eligible employees, provided the same level of
matching contributions continues to be made through the
effective date of the amendment and the plan meets the ADP
test for the entire plan year on a "current year" testing
In addition, eligible employees must be provided a
reasonable opportunity to change their deferral election
prior to the effective date of the suspension or
However, prior to the issuance of the new proposed
regulations, the IRS regulations did not address whether an
employer could suspend safe harbor non-elective
contribution mid-year, suggesting that this was not
Instead, under the existing regulations, an employer
may suspend its obligation to make safe harbor non-elective
contributions mid-year only by terminating its safe harbor
plan, a draconian step most employers wish to avoid.
Still, under the proposed rules, the conditions for
terminating a plan providing a safe harbor non-elective
contribution mid-year are high.
Basically, termination is permissible only in
associate with a corporate transaction or if the employer
"incurs a substantial business hardship comparable to a
substantial business hardship described in section 412(c)".
Under Code section 412(c), a facts and circumstances
test determines whether an employer has incurred a
"substantial business hardship."
Some of the factors include (but are not limited to)
the employer is operating at an economic
there is substantial unemployment or
underemployment in the trade or business and in the
industry concerned, and
the sales and profits of the industry concerned
are depressed or declining.
In addition, a plan sponsor must satisfy the same
rules relating to employee notification and discrimination
testing that apply to the mid-year suspension of safe
harbor matching contributions.
The effect of the new guidance is that, if an
employer can meet the requirements to terminate its safe
harbor plan mid-year, it may instead simply suspend or
reduce the non-elective contribution.
As stated above, this is a difficult standard to meet
and, therefore, it is unclear how helpful the new proposed
guidance may be.
In any event, the proposed regulations clarify that,
if safe harbor employer contributions - matching or
non-elective - are suspended or reduced mid-year, the
section 401(a)(17) compensation limit must be prorated, and
the plan will become subject to the top-heavy rules.
The proposed regulations provide that employers may
rely on them for amendments adopted after May 18,
Any provision in the final regulations that is more
restrictive will apply prospectively.