IRS Publishes Final Business Hardship Rules for Safe Harbor Defined Contribution Plans
The IRS published final regulations permitting sponsors of 401(k) plans to reduce or suspend nonelective safe harbor contributions in the middle of the plan year. The regulations provide that such midyear contribution changes may be made if (1) the employer is operating at an economic loss; or (2) the employer provides notice to participants prior to the start of a plan year that nonelective contributions may be reduced or suspended during that upcoming plan year and provides a supplemental notice to participants at least 30 days before making any midyear contribution changes. Prior to the issuance of these rules, the 2009 proposed rules provided that safe harbor plan sponsors must show a “substantial business hardship” in order to be able to make midyear reductions or suspensions to nonelective contributions.
In addition, to achieve uniformity between the rules applying to nonelective contributions and those applying to safe harbor matching contributions, the final regulations provide that the requirements for making midyear matching contributions changes are the same as they are for nonelective contributions. In other words, employers may suspend or reduce safe harbor matching contributions if they meet either (1) or (2), as stated above.
These rules go into effect for plan years beginning on or after January 1, 2015. The IRS also indicated that it may provide additional relief in the future for safe harbor plans.