Recently, many employers requested greater flexibility to reduce or
suspend safe harbor non-elective contributions to their 401(k) plans. They felt
that a temporary reduction or suspension of contributions would be a better
alternative than outright terminating their plans. Although the applicable
regulations contained procedures for reducing or suspending safe harbor
matching contributions, it wasn’t until Treasury issued proposed regulations on
May 18, 2009, that a procedure was available to reduce or suspend safe harbor
non-elective contributions. Recently, Treasury issued final regulations that
revise the requirements for permitted mid-year reductions or suspensions of
safe harbor non-elective contributions. Somewhat surprisingly, the final
regulations also modified the procedures for mid-year reductions or suspensions
of safe harbor matching contributions to 401(k) plans. They also suggested that
some relief may be on the way with respect to other types of mid-year plan
amendments.
One of the key considerations for sponsors of safe
harbor plans will be whether to modify their safe harbor notices, and in some
cases, send new notices in advance of the 2014 plan year. That will depend on
the type of safe harbor contributions provided under the plan because different
effective dates apply to plans with safe harbor non-elective contributions and
safe harbor matching contributions.
In particular, employers who sponsor
401(k) plans that provide safe harbor non-elective contributions may
want to consider resending their safe harbor notices in mid-December to include
a statement that the employer may amend the plan to reduce or suspend the
contributions mid-year. Employers who sponsor 401(k) plans that provide safe
harbor matching contributions, however, should not need to add such
a statement to their 2014 plan year notices and instead should be able to wait
until sending the 2015 plan year notice to include such a caveat.
Safe Harbor
Non-Elective Contributions
The final regulations actually ease
the requirements for reducing or suspending safe harbor non-elective
contributions mid-year. Under the proposed regulations, employers needed to be
operating under a substantial economic hardship in order to reduce or suspend
the non-elective contributions mid-year. The final regulations relax this
standard by requiring employers to be operating at an economic loss. This new standard
should be easier to satisfy than the former standard because it does not
require employers to determine the health of their industry or their ability to
continue to maintain their 401(k) plans.
Alternatively, employers can reduce
or suspend their non-elective contributions, regardless of financial condition,
if they notify participants before the beginning of the plan year that their
contributions could be reduced or suspended mid-year. Employers also must
provide participants at least 30 days’ advance written notice of any such
reduction or suspension.
These rules are effective
retroactively to amendments adopted after May 18, 2009. While it is doubtful
that any employer included such a caveat in its prior year safe harbor notices,
there is still time to include this caveat in the 2014 notice. The safe harbor
regulations require employers to distribute safe harbor notices in a “timely”
manner. Distribution is deemed to be timely if the notice is delivered between
30-90 days before the start of the plan year. For plan years beginning January
1, 2014, the deadline would have been December 2, 2013. Because the IRS
published the final regulations so close to this deadline, however, we (and
many other commentators) expect the IRS to be more forgiving in determining
whether a notice was delivered in a “timely” manner. That should especially be
the case if an employer previously delivered a safe harbor notice before
December 2, 2013, and later sent a revised notice to include a caveat about the
possibility of suspending contributions mid-year. As such, if an employer
distributes a new safe harbor notice in mid-December, we believe that should
still be considered timely delivery.
Safe Harbor
Matching Contributions
The final 401(k) and 401(m)
regulations issued in 2004 had contained procedures for suspending safe harbor
matching contributions. That was the main reason why the proposed regulations
in 2009 addressed only non-elective contributions and not safe harbor matching
contributions—there were already procedures in place for safe harbor matching
contributions but not non-elective contributions. As such, there was no
requirement to be operating at a loss or hardship or to have issued a caveat in
the notice delivered in the prior year about the potential to suspending
matching contributions in the current year. Yet, in order to provide uniformity
between the requirements for non-elective contributions and matching
contributions, the final regulations now impose the same requirements on safe
harbor matching contributions plans that they imposed on safe harbor
non-elective contribution plans.
The IRS recognized the significance
of this change, and as such, the final regulations state that these
requirements do not become effective until plan years that begin on or after
January 1, 2015. As such, employers should not need to issue any caveats in
their 2014 plan year notices because they may still reduce or suspend safe
harbor matching contributions in 2014 under the prior regulations.
Other Mid-Year Plan
Amendments
One question that
has sparked some debate in
recent years is to what extent may an employer
amend a safe harbor 401(k) plan in the middle of a plan year. As a general
matter, the 401(k) regulations state that the provisions of a safe harbor plan
must be adopted before the start of the plan year and must remain in effect
“for an entire 12-month plan year.” Safe harbor provisions that are changed after
the start of the plan year generally cause the plan to lose safe harbor status.
In Announcement 2007-59, the IRS offered some relief, stating that a mid-year amendment
to implement a qualified Roth contribution program or hardship withdrawals
would not cause the plan to lose its safe harbor status.
That left open the question of
whether an employer could make other types of mid-year amendments and have the
plan preserve its safe harbor status, or whether the items listed in
Announcement 2007-59 were the only permitted mid-year amendments. Some
commentators have taken a conservative position that any other mid-year
amendments beyond what is specified in Announcement 2007-59 would cause the
plan to lose its safe harbor status. At recent conferences, however, IRS
officials have suggested that if a mid-year amendment does not impact a
provision that would have affected a participant’s deferral decision at the
start of the year, that amendment should not jeopardize the plan’s safe harbor
status.
The regulations indicate that future
guidance should be on the way and suggest that employers have even more
flexibility than previously indicated to adopt mid-year amendments to safe
harbor plans. The regulations state that a plan that has provisions that
satisfy the safe harbor requirements generally will lose safe harbor status if
the plan is amended to change “such provisions,” except in certain
circumstances. That language suggests that as long as the actual safe harbor
provisions are not amended mid-year, an employer should be able to amend other
parts of the plan, including provisions that may be described in a safe harbor
notice, without causing the plan to lose safe harbor status. Further, the regulations
add even the safe harbor provisions may be amended mid-year to the extent
provided by the IRS in future Internal Revenue Bulletin releases.
The preamble explains that this
change will provide the IRS with greater flexibility to develop rules to address
special circumstances under which a mid-year change to a section 401(k) safe
harbor plan is appropriate, including “an amendment to the plan in connection
with a mid-year corporate transaction.” That is welcome news because a common
question has been whether an employer could allow new employees who arrived
through a corporate transaction could begin participating in the plan
immediately, or whether, that type of change would jeopardize the safe harbor
status of the plan. It would seem that this type of change should be allowed,
as well as other amendments to the plan. It is comforting to see that the IRS
appears to be offering more flexibility in this area.
Key Take-Aways for
Employers
The final regulations provide two key
take-aways for employers. First, they should decide whether to issue new or
modified safe harbor notices. As mentioned at the start of this blog, employers
whose plans provide safe harbor non-elective contributions should
consider issuing a new notice that adds that the plan could be amended mid-year
to reduce or eliminate these contributions. A plan that provides safe
harbor matching contributions, however, should be able to wait
until next year to include this type of statement in its safe harbor notice.
Second, it appears that the IRS is
becoming more flexible in allowing mid-year amendments to safe harbor plans
that will not cause these plans to lose safe habor status. Still, if employers
are contemplating a mid-year amendment to their safe harbor plans, they should
talk to counsel before proceeding. Although the IRS is becoming more flexible,
the guidance is not always entirely clear with respect to certain types of
amendments. Until further guidance is issued, employers should proceed
carefully.
This is summary of an insightful
article penned by Porter
Wright Morris & Arthur LLP.