W2 Issues/Concerns


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In the News: IRS Issues Final Safe Harbor Rules For Employers Facing Business Hardships

Bloomberg BNA recently reported that the Internal Revenue Service (IRS) has issued final regulations allowing employers operating at an economic loss to suspend or reduce non-elective contributions made to safe harbor tax code Section 401(k) plans midyear.

The regulations came at the request of businesses during the economic downturn, when employers were seeking an alternative to terminating their employee retirement plans if they needed to temporarily reduce or suspend their non-elective contributions to the plans, American Benefits Council senior counsel Jan Jacobson noted.

Under the 2009 proposed rules, which employers were allowed to rely on until final rules were published this past month, employers had to have a substantial business hardship to suspend or reduce midyear non-elective contributions to safe harbor 401(k) plans, according to the IRS. Under the final regulations, employers also can reduce or suspend their nonelective contributions, regardless of their financial condition, if they notify participants before the beginning of the plan year that their contributions could be reduced or suspended midyear. Further, the IRS noted that if a reduction or suspension does occur, employers must provide subsequent notice to participants at least 30 days prior to the reduction or suspension of the contribution.

The IRS indicated that the final rules were modified in an effort to “achieve uniformity” between the rules applying to midyear reductions or suspension of safe harbor matching contributions and the rules governing midyear reductions or suspensions of safe harbor nonelective contributions. As a result, safe harbor matching contributions are permitted to be reduced or suspended only if an employer meets one of two requirements, the IRS said.

The IRS noted that because this is a change from the previous requirements on matching contributions, the change is effective for plan years beginning on or after January 1, 2015. Further, the group noted that it might publish more guidance of “general applicability” in the Internal Revenue Bulletin that addresses more situations in which a plan won’t fail to satisfy the requirements of a safe harbor Section 401(k) plan year, “even if the plan is amended during the plan year to implement a mid-year change to those provisions.”

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