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Employee Benefit Services

IRS Allows Safe Harbor Plans to Stop Contributions Mid-year

In November, the Internal Revenue Service (IRS) issued final regulations allowing plan sponsors to    reduce or discontinue safe harbor contributions during the plan year.  Prior to these final rules, sponsors were only allowed to discontinue safe harbor commitments by demonstrating a financial hardship.  The IRS will now allow the cessation of safe harbor amounts mid-year for plans that provide specific  language in their annual notices to plan participants.

Safe harbor provisions allow 401(k) plan sponsors to commit to a specific contribution (either a match or a nonelective contribution) for the coming year in exchange for automatic passage of nondiscrimination testing.  This provides the highly paid employees with assurance that their contribution amounts made during the year will not be subject to correction after the year end.  To use the safe harbor, plan documents must provide for these contributions and a notice must be provided to all plan participants between 30 to 90 days prior to the beginning of the plan year.

Under the final regulations, to be able to suspend or reduce safe harbor contributions during the coming year, the safe harbor notice must be modified with language such as the following:

The plan may be amended during the plan year to reduce or suspend safe harbor nonelective contributions. The reduction or suspension will not apply until at least 30 days after you are provided notice of the reduction or suspension.  

To suspend or reduce the safe harbor contributions, employers must amend the plan and provide the supplemental notice.  The safe harbor contributions will still be required up until 30 days following the provision of the notice.  In addition, the plan will be subject to the nondiscrimination testing on its 401(k) contributions and any match for the entire plan year.  Plan sponsors that do not include the above       language in their notices can still suspend or reduce safe harbor contributions by demonstrating financial hardship.

These new rules will allow employers added flexibility if it is deemed necessary to modify plan           contributions in difficult economic times.  We have included this language in the majority of our 2014 safe harbor notices for our clients.  Please let us know if you have any questions.
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