As an alternative to plan termination, proposed regulations allow sponsors of qualified non-elective contribution 401(k) safe-harbor plans to amend their plans so that employer contributions may be reduced or suspended if the employer is suffering a substantial business hardship. Key: Safe-harbor plans that choose this alternative must satisfy the ADP and ACP non-discrimination tests for the entire plan year. In addition, the top-heavy rules apply. You may rely on these regs until final regs are issued.
Two Safe-Harbor Plans, One Relief Procedure
Broadly speaking, there are two types of 401(k) safe-harbor plans — plans that provide qualified employer matching contributions (QMACs) and plans under which employers make qualified non-elective contributions (QNECs) into employees' accounts. QMACs already have the ability to reduce or suspend matching contributions if employers are suffering substantial business hardships, which are defined as:
- operating at an economic loss;
- substantial unemployment or underemployment in the employer's industry;
- depressed or declining sales and profits; or
- a reasonable expectation that the plan will terminate without relief.
The proposed regs extend the option to reduce or suspend employer contributions to QNECs under the same circumstances and using the same procedures. Under the proposed regs, plans must be amended to provide for the reduction or suspension of qualified non-elective contributions before the end of the plan year, and satisfy all applicable non-discrimination tests using the current year testing method for the entire plan year. In addition, these rules apply.
- All eligible employees must be given a supplemental notice that explains the reduction or suspension of future safe harbor non-elective contributions and its consequences, the procedure for changing their pre-tax elections, and the effective date of the amendment.
- The reduction or suspension of safe harbor non-elective contributions is effective no later than 30 days after employees receive their supplemental notice or the date the amendment is adopted. Timing is everything: Because of this 30-day rule, you can't implement this change by adopting the amendment at the end of the plan year.
- Eligible employees must have a reasonable opportunity prior to the reduction or suspension to change their pre-tax elections.
- The plan satisfies the safe harbor non-elective contribution requirements through the effective date of the amendment.
- The overall pre-tax contribution, after-tax contribution, and employer matching contribution limit (usually called the 401(a)(17) compensation limits) must be prorated. This last requirement now applies to QMACs, as well.
Click here to read the proposed regs.