IRS Issues Final Safe Harbor Rules For Employers Facing Business Hardships

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By Kristen Ricaurte Knebel  

Nov. 14 --Employers operating at an economic loss are permitted to suspend or reduce nonelective contributions made to safe harbor tax code Section 401(k) plans midyear, the Internal Revenue Service said in newly issued final regulations.

The regulations came at the request of businesses during the economic downturn, when employers were seeking an alternative to terminating their employee retirement plans if they needed to temporarily reduce or suspend their nonelective contributions to the plans, Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, told Bloomberg BNA Nov. 14.

“We don't have the same financial stresses now, so I would suspect” fewer employers will use these rules than would have earlier, “but it is good to have in place for, if you're an employer and you're operating at an economic loss, then that may be that you want to eliminate those contributions, because you're trying to stay in business,” Jacobson said.

Under the 2009 proposed rules (27 HRR 548, 5/25/09), which employers were allowed to rely on until final rules were published, employers had to have a substantial business hardship to suspend or reduce midyear nonelective contributions to safe harbor 401(k) plans, the IRS said.

Under the final regulations, employers also can reduce or suspend their nonelective contributions, regardless of their financial condition, if they notify participants before the beginning of the plan year that their contributions could be reduced or suspended midyear, the IRS said in the final rules (T.D. 9641), issued Nov. 14.

If a reduction or suspension does occur, employers must provide subsequent notice to participants at least 30 days prior to the reduction or suspension of the contribution, the IRS said.

The final rules were modified in an effort to “achieve uniformity” between the rules applying to midyear reductions or suspension of safe harbor matching contributions and the rules governing midyear reductions or suspensions of safe harbor nonelective contributions, the IRS said.

“The final regulations modify the rules that apply to mid-year amendments reducing or suspending safe harbor matching contributions so that the requirements that apply to a mid-year reduction or suspension of safe harbor nonelective contributions are not stricter than those that apply to a mid-year reduction or suspension of safe harbor matching contributions,” the IRS said.

As a result, safe harbor matching contributions are permitted to be reduced or suspended only if an employer meets one of two requirements, the IRS said.

An employer must either be operating at an economic loss, or it must provide a notice to participants prior to the start of the plan year of the possibility that contributions will be suspended or reduced and subsequently provide an additional notice at least 30 days prior to a midyear change, the IRS said.

Because this is a change from the previous requirements on matching contributions, the change is effective for plan years beginning on or after Jan. 1, 2015, the IRS said.

The IRS said it might publish more guidance of “general applicability” in the Internal Revenue Bulletin that addresses more situations in which a plan won't fail to satisfy the requirements of a safe harbor Section 401(k) plan year, “even if the plan is amended during the plan year to implement a mid-year change to those provisions.”

The final rules generally apply to safe harbor plan amendments made after May 18, 2009, the IRS said. The final rules were effective Nov. 15, when they were published in the Federal Register (78 Fed. Reg. 68,735).


To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at

To contact the editor responsible for this story: Phil Kushin at

Text of the final regulations is at

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