COVID-19 Compliance Corner: IRS Eases 401(k) Safe Harbor Suspension Rules

Each week, Carol Buckmann, with Cohen & Buckmann P.C., will explain legislative provisions or official guidance related to the COVID-19 pandemic that affect retirement and health plan sponsors.

Safe harbor 401(k) plans have become popular because they can avoid the need for plan sponsors to deal with failures of nondiscrimination testing when non-highly compensated employees (NHCEs) don’t contribute at sufficient levels. However, since these plans come with a price—in addition to requiring minimum employer contributions for non-highly compensated employees—they are subject to a general requirement that safe harbor plan provisions must be in effect for the entire plan year. There are exceptions in the regulations allowing plans that satisfy certain requirements to suspend contributions, but these have posed a problem for plan sponsors that determine they need to suspend contributions as a result of COVID-19. 

The IRS has just issued a notice that temporarily eases some of these rules for amendments adopted from March 13 through August 31. These rules apply equally to reductions of safe harbor contributions and to 403(b) plans with safe harbor provisions.

Suspending Contributions for Highly Compensated Employees

Safe harbor 401(k) plans are not required to cover highly compensated employees (HCEs). While the IRS says this is technically not new relief, the agency has clarified that it is permissible for plan sponsors to suspend contributions for highly compensated employees at any time. The plan will not lose its safe harbor status by doing so. However, the highly compensated employees must receive notice of the suspension 30 days before its effective date since it changes information in the safe harbor notice previously provided. While not mentioned in the notice, highly compensated employees would presumably retain contributions made for them through the date of the suspension in order to comply with Internal Revenue Code Section 411(d).

Safe Harbor Contribution Suspensions that Include Non-Highly Compensated Employees

Safe harbor contributions under both matching and nonelective contribution safe harbor plans are permitted to be suspended under the regular rules provided either: 1) the plan sponsor is operating at an economic loss for the plan year or 2) the safe harbor notice for the year included language reserving the right to suspend contributions in the future. If either of these requirements is met, participants are required to receive at least 30 days’ advance notice of the suspension and have a reasonable opportunity to change their deferral elections. Under the temporary IRS relief, both safe harbor matching plans and safe harbor nonelective plans can proceed to suspend contributions even if the economic loss or reservation of rights requirements are not satisfied.  

Suspending Contributions in Safe Harbor Match Plans

Under the “regular” rules, a suspension of safe harbor contributions cannot be effective until 30 days after participants have received notice of the upcoming suspension—or the date of the plan amendment, if later. Participants must also have an advance opportunity to change their deferral elections, but this is usually not a problem because many plans permit changes on a daily basis. These requirements have not been waived by the IRS in the temporary relief.

Additional Relief for Nonelective Contribution Safe Harbor Plans

These plan sponsors may suspend contributions through August 31 without giving 30 days advance notice. They must notify employees of any suspension by the effective date of the suspension and the notification must be no later than August 31. Therefore, for nonelective contribution safe harbor plans only, notice of the suspension may be retroactive.

A Big Catch

Note that plan sponsors cannot change from the matching contribution safe harbor design to the nonelective design mid-year to take advantage of the more lenient rules.

Other Issues for Plan Sponsors to Consider

Refunds of excess contributions: If safe harbor contributions are suspended mid-year, the plan contributions will be subject to the nondiscrimination testing requirements for the entire plan year, including the period of time during which the safe harbor contributions were made. The current year testing method must be used. Highly compensated employees who are used to making the maximum plan deferrals may now need to receive refunds of excess contributions and excess matching contributions after the end of the year.

Top heavy rules: A safe harbor contribution suspension does not eliminate any requirement to make top heavy contributions for the plan year. Sponsors of larger plans usually don’t have to worry about a plan becoming top heavy, and plans that provide profit sharing contributions in addition to safe harbor contributions are already subject to top heavy testing. However, these rules may affect plans of smaller employers that were not required to do top heavy testing because their plans provided only safe harbor contributions. The top heavy rules generally require non-key employees to receive a minimum contribution of 3% of compensation. These plan sponsors will want to consider whether their plans will pass any required top heavy testing if safe harbor contributions are suspended.

If top heavy contributions are required for 2020, two rules may limit the top heavy contributions that would be required. First, the top heavy contribution is limited to the maximum percentage of compensation contributed for any key employee in the plan year, if that is less than 3%. Second, employer contributions already made in 2020 can count toward the top heavy contributions. 

Vesting requirements: If the plan sponsor is also laying off employees or a longer term suspension of contributions is contemplated, and the plan is a type of safe harbor plan that does not already provide for 100% vesting, plan sponsors should be aware that the IRS may require full vesting of affected participants if there is a partial plan termination. Full vesting is also required if there is a permanent discontinuance of contributions.

Other benefit provisions: Plan sponsors that are suspending safe harbor contributions might consider adopting a discretionary contribution provision. They will then have the option to make a 2020 or future year contribution that is less than the required safe harbor contribution. Plan sponsors with nonqualified unfunded deferred compensation plans in place should also be aware that highly compensated employees excluded from safe harbor contributions will not be able to compensate by increasing their elected contributions to these nonqualified plans in the middle of a year.


Carol Buckmann is a co-founding partner of Cohen & Buckmann P.C. As a highly regarded employee benefits and ERISA [Employee Retirement Income Security Act] attorney, Buckmann deals with the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.

She has 40 years of practice in this area of the law and a depth of experience on complex pension law and fiduciary problems. She regularly shares her thoughts on new developments in the benefits industry on Insights, Cohen & Buckmann’s blog, and writes and speaks on ERISA topics. Buckmann has been recognized by Martindale-Hubbell as an AV Pre-eminent Rated Lawyer, was selected for inclusion in the Best Lawyers in America and was named one of the Super Lawyers in Employee Benefits.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.