Our employee benefits work increasingly reflects the impact of the economy on our clients. One of our clients recently came to us because of cash flow problems and wanted to know: Could the company suspend its safe harbor matching contributions until things get better? That company is not alone as many employers find themselves struggling with this recession and having to make similar tough decisions. We were able to help them with our legal advice that they could reduce and/or suspend their safe harbor matching contributions, subject to certain requirements.
401(k) plans can avoid performing nondiscrimination testing [more commonly known as the Actual Contribution Percentage (ACP) test and the Actual Deferral Percentage (ADP) test], if the plan satisfies the Treasury Regulation safe harbor requirements. One of these requirements include that a plan must either provide: (i) a safe harbor matching contribution formula, or (ii) a safe harbor nonelective (e.g., profit sharing) contribution equal to 3% of an eligible employee’s compensation (regardless of whether the employee makes deferrals). For those plans that use safe harbor matching contributions, the Regulation enables an employer to reduce and/or suspend those contributions on a prospective basis. However, to do so, an employer must comply with the following rules:
- The participating employees must be provided with a notice that provides the following information:
(i) that the plan will be amended to reduce and/or suspend the matching contributions on a prospective basis and when that amendment will take effect;
(ii) how that reduction and/or suspension will affect the participants; and
(iii) how the participants can change their current deferrals;
- The reduction or the suspension of the safe harbor matching contribution may not be effective earlier than 30 days upon receipt of the notice by eligible employees (or 30 days after the amendment is adopted, if that’s later);
- Eligible employees must be given a reasonable opportunity to change their existing deferrals after receipt of the notice, but prior to the effective date of the amendment;
- The plan must be amended to provide that the ADP and ACP testing will be satisfied for the entire plan year using the current year testing method as set forth in the Regulation; and
- All safe harbor matches must be given with respect to all amounts deferred through the effective date of the amendment.
It is important to note that the Regulation does not provide for the reduction and/or suspension of safe harbor nonelective contributions. Therefore, an employer may not suspend or reduce safe harbor nonelective contributions (but may terminate the plan).
The reduction or suspension of the safe harbor matching contributions can provide much needed financial relief to employers. During these harsh economic times, this is one option, among several, that employers can utilize to help with cash flow.