June 2009
Suspension or Reduction of Safe Harbor
Nonelective Contributions
Proposed Regulations
On May 18, 2009 the IRS issued proposed regulations which will allow employers with safe harbor 401(k) plans who incur a substantial business hardship to reduce or suspend the nonelective contribution (QNEC). Currently, only the safe harbor matching contribution (QMAC) can be reduced or suspended; there is no substantial business hardship to reduce or suspend a QMAC. Prior to the proposed regulations, the only way to suspend a QNEC was by terminating the plan.
The IRS is requesting comments by August 17th with a public hearing scheduled for September 23rd. However, plan sponsors may rely on the proposed regulations; should the final regulations be more stringent than the proposed regulations, the more stringent regulations will be prospective only.
What it means to Plan Sponsors
A Plan Sponsor with a safe harbor 401(k) plan utilizing the nonelective contribution design wishing to suspend or reduce contributions must:
- Incur a substantial hardship as described in IRC§ 412(c)
- Notify all eligible employees of the reduction or suspension
- Provide employees with a reasonable opportunity to change their contribution election within a reasonable period of time after receiving the notice.
- Amend the plan to provide that the ADP test will be satisfied for the entire plan year in which the suspension or reduction occurs using the current year method.
- The plan satisfies the safe harbor nonelective contribution with respect to compensation paid through the effective date of the amendment.
The amendment must be adopted after May 18, 2009 and the suspension can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted.
The Notice
The notice requirement is satisfied if each eligible employee is given a notice that explains
- The consequences of the amendment
- The procedures for changing elective deferral elections
- The effective date of the amendment
Bottom line: Before you do anything, you want to determine the impact of suspending/reducing the nonelective contribution has on your top heavy status. You could find yourself eliminating the QNEC only to be faced with making a top heavy contribution. At the same time, determine if you can pass the nondiscrimination tests on a current year basis.
What should you do now?
- Work with counsel to determine if you can satisfy the substantial business hardship requirements.
- Determine if you will be subject to the top heavy minimum contribution.
- Determine if you will satisfy the ADP/ACP tests using the current year method
- Ensure that you make the nonelective contribution for the period up to the effective date of the amendment including proration of compensation.
- If you decide to utilize the proposed regulations:
- Draft and distribute the notice to participants
- Amend your plan
- Perform nondiscrimination testing
- Perform top heavy testing
Note: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plans. For more information on this ErisaALERT, contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
To comply with Circular 230 issued by the IRS, we hereby inform you that any tax advice contained in this communication (including attachments and/or enclosures, if any) is not intended or written to be used for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to one or more taxpayers any transaction or matter addressed herein.
Copyright©2009, ERISAdiagnostics, Inc. www.erisadiagnostics.com
ErisaALERT 2009-3
