Regs. permit midyear changes to employer contributions to 401(k) plans

The IRS issued final regulations that permit employers to make midyear reductions or suspensions of safe-harbor matching or nonelective contributions to retirement plans in certain situations (T.D. 9641).

To qualify for salary deferral, Sec. 401(k) plans must meet certain nondiscrimination rules that require non-highly compensated employees to participate in the plans at certain levels compared with the participation of highly compensated employees (called the actual deferral percentage (ADP) test). In lieu of this complicated formula, employers are permitted to use safe-harbor methods that involve either (1) making qualified matching contributions or (2) making nonelective contributions to all eligible non-highly compensated employees. The final regulations contain the rules for reducing or suspending these contributions in the middle of a plan year. 

Proposed regulations were issued on May 18, 2009, permitting a midyear reduction or suspension of nonelective contributions if the employer incurred a substantial business hardship under Sec. 412(c) (74 Fed. Reg. 23134). Commenters objected to this requirement for three reasons:

1. It was burdensome for employers to determine whether they satisfied each of the elements of substantial business hardship under Sec. 412(c);
2. Employers will not have certainty that they satisfy the substantial business hardship requirements; and
3. There was no reason to treat nonelective contributions and matching contributions differently by not requiring that employers establish hardship before reducing or suspending matching contributions.

In response, the final regulations change the requirement that employers must prove a substantial business hardship to one that an employer be operating at an economic loss before it can reduce or suspend nonelective contributions and add the requirement of economic loss as a prerequisite for reducing or suspending matching contributions.

The final regulations also permit an employer to reduce or suspend safe-harbor nonelective contributions without regard to the financial condition of the employer if notice is provided to participants before the beginning of the plan year that discloses the possibility that the contributions might be reduced or suspended mid-year. The notice must also provide that a supplemental notice will be provided to plan participants if a reduction or suspension does occur and that the reduction or suspension will not apply until at least 30 days after the supplemental notice is provided.

The rule permitting an employer to reduce or suspend nonelective contributions if the employer suffers an economic loss applies to plan amendments after May 18, 2009, the date of the proposed regulations, presumably because the rules are more liberal than those regulations. The rule that, for the first time, applies the economic loss requirement to reductions or suspensions of matching contributions will be effective for plan years beginning on or after Jan. 1, 2015.     

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.