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Nov 2013
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November 22, 2013

IRS Allows Mid-Year Elimination of Safe Harbor Contributions


Last week the IRS released regulations affecting safe harbor 401(k) plans. If you have a safe harbor plan with mandatory nonelective (3%) contributions, keep reading because the notice you are about to send to participants may be affected. If your plan has matching safe harbor contributions, you can put this in a file until next year.

Nonelective Safe Harbor Plans

Plan sponsors already have the ability to establish a conditional safe harbor plan by providing a notice to participants before the beginning of the plan year that says the plan sponsor may make a nonelective 3% safe harbor contribution for the plan year, and then providing a supplemental notice later in the year if the contribution is going to be made. Nothing has changed here. If this is the type of notice you have issued, you can stop reading.

Until now, a plan that is a mandatory nonelective safe harbor plan could not be amended mid-year to eliminate the 3% contribution for the year, except in extreme circumstances.

The IRS has changed that. Effective for the 2014 plan year, a mandatory nonelective safe harbor plan can eliminate the contribution mid-year in two circumstances:
 
  1. The company is operating at a loss for the year.
  2. The safe harbor notice distributed before the beginning of the plan year indicates that the plan may be amended to remove the safe harbor contribution during the year. If the plan is amended during the year, at least 30 days' advance notice is required during which time participants must be permitted to change their deferral election, the contribution must be made for compensation paid before the change and the plan must pass ADP/ACP testing for the entire year.

Matching Safe Harbor Plans

Plans with matching safe harbor contributions can already be amended mid-year, for any reason, to eliminate the matching contribution if advance notice is given to participants.

Unfortunately, the IRS has changed that too. The bad news is that the same two circumstances described above are now the only ways the matching contribution can be eliminated mid year: the company is operating at a loss or the required information is provided with the safe harbor notice before the beginning of the plan year (and the other requirements are met if the contribution is actually eliminated during the year).

The good news is that this rule does not take effect until 2015. So for 2014, there’s no need to put anything in the safe harbor notice before the beginning of the upcoming plan year.

What to Do Now

If you have a mandatory nonelective safe harbor plan, you’ll want to put something in your safe harbor notice now that says the plan may be amended mid-year to eliminate the contribution. Remember, notices must be distributed by the end of the month, so you’ll want to act quickly. Contact us for assistance.

If you have a matching safe harbor plan, you don’t have to do anything different this year. But next year you will want to include changes to your notice to make sure you can eliminate the matching contribution mid-year if needed.

If you have questions about the IRS modifications to the safe harbor rules, please contact any member of the Warner Norcross & Judd Employee Benefits/Executive Compensation Practice Group.

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