During the most recent recession (some might say a mini depression), many employers requested greater flexibility to reduce or suspend safe harbor non-elective contributions to their 401(k) plans. They felt that a temporary reduction or suspension of contributions would be a better alternative than outright terminating their plans. Although the applicable regulations contained procedures for reducing or suspending safe harbor matching contributions, it wasn’t until Treasury issued proposed regulations on May 18, 2009, that a procedure was available to reduce or suspend safe harbor non-elective contributions. Recently, Treasury issued final regulations that revise the requirements for permitted mid-year reductions or suspensions of safe harbor non-elective contributions. Somewhat surprisingly, the final regulations also modified the procedures for mid-year reductions or suspensions of safe harbor matching contributions to 401(k) plans. They also suggested that some relief may be on the way with respect to other types of mid-year plan amendments.

One of the key considerations for sponsors of safe harbor plans will be whether to modify their safe harbor notices, and in some cases, send new notices in advance of the 2014 plan year. That will depend on the type of safe harbor contributions provided under the plan because different effective dates apply to plans with safe harbor non-elective contributions and safe harbor matching contributions.

In particular, employers who sponsor 401(k) plans that provide safe harbor non-elective contributions may want to consider resending their safe harbor notices in mid-December to include a statement that the employer may amend the plan to reduce or suspend the contributions mid-year. Employers who sponsor 401(k) plans that provide safe harbor matching contributions, however, should not need to add such a statement to their 2014 plan year notices and instead should be able to wait until sending the 2015 plan year notice to include such a caveat.

Safe Harbor Non-Elective Contributions

The final regulations actually ease the requirements for reducing or suspending safe harbor non-elective contributions mid-year. Under the proposed regulations, employers needed to be operating under a substantial economic hardship in order to reduce or suspend the non-elective contributions mid-year. The final regulations relax this standard by requiring employers to be operating at an economic loss. This new standard should be easier to satisfy than the former standard because it does not require employers to determine the health of their industry or their ability to continue to maintain their 401(k) plans.

Alternatively, employers can reduce or suspend their non-elective contributions, regardless of financial condition, if they notify participants before the beginning of the plan year that their contributions could be reduced or suspended mid-year. Employers also must provide participants at least 30 days’ advance written notice of any such reduction or suspension.

These rules are effective retroactively to amendments adopted after May 18, 2009. While it is doubtful that any employer included such a caveat in its prior year safe harbor notices, there is still time to include this caveat in the 2014 notice. The safe harbor regulations require employers to distribute safe harbor notices in a “timely” manner. Distribution is deemed to be timely if the notice is delivered between 30-90 days before the start of the plan year. For plan years beginning January 1, 2014, the deadline would have been December 2, 2013. Because the IRS published the final regulations so close to this deadline, however, we (and many other commentators) expect the IRS to be more forgiving in determining whether a notice was delivered in a “timely” manner. That should especially be the case if an employer previously delivered a safe harbor notice before December 2, 2013, and later sent a revised notice to include a caveat about the possibility of suspending contributions mid-year. As such, if an employer distributes a new safe harbor notice in mid-December, we believe that should still be considered timely delivery.

Safe Harbor Matching Contributions

The final 401(k) and 401(m) regulations issued in 2004 had contained procedures for suspending safe harbor matching contributions. That was the main reason why the proposed regulations in 2009 addressed only non-elective contributions and not safe harbor matching contributions—there were already procedures in place for safe harbor matching contributions but not non-elective contributions. As such, there was no requirement to be operating at a loss or hardship or to have issued a caveat in the notice delivered in the prior year about the potential to suspending matching contributions in the current year. Yet, in order to provide uniformity between the requirements for non-elective contributions and matching contributions, the final regulations now impose the same requirements on safe harbor matching contributions plans that they imposed on safe harbor non-elective contribution plans.

The IRS recognized the significance of this change, and as such, the final regulations state that these requirements do not become effective until plan years that begin on or after January 1, 2015. As such, employers should not need to issue any caveats in their 2014 plan year notices because they may still reduce or suspend safe harbor matching contributions in 2014 under the prior regulations.

Other Mid-Year Plan Amendments

One question that has sparked some debate in recent years is to what extent may an employer amend a safe harbor 401(k) plan in the middle of a plan year. As a general matter, the 401(k) regulations state that the provisions of a safe harbor plan must be adopted before the start of the plan year and must remain in effect “for an entire 12-month plan year.” Safe harbor provisions that are changed after the start of the plan year generally cause the plan to lose safe harbor status. In Announcement 2007-59, the IRS offered some relief, stating that a mid-year amendment to implement a qualified Roth contribution program or hardship withdrawals would not cause the plan to lose its safe harbor status.

That left open the question of whether an employer could make other types of mid-year amendments and have the plan preserve its safe harbor status, or whether the items listed in Announcement 2007-59 were the only permitted mid-year amendments. Some commentators have taken a conservative position that any other mid-year amendments beyond what is specified in Announcement 2007-59 would cause the plan to lose its safe harbor status. At recent conferences, however, IRS officials have suggested that if a mid-year amendment does not impact a provision that would have affected a participant’s deferral decision at the start of the year, that amendment should not jeopardize the plan’s safe harbor status.

The regulations indicate that future guidance should be on the way and suggest that employers have even more flexibility than previously indicated to adopt mid-year amendments to safe harbor plans. The regulations state that a plan that has provisions that satisfy the safe harbor requirements generally will lose safe harbor status if the plan is amended to change “such provisions,” except in certain circumstances. That language suggests that as long as the actual safe harbor provisions are not amended mid-year, an employer should be able to amend other parts of the plan, including provisions that may be described in a safe harbor notice, without causing the plan to lose safe harbor status. Further, the regulations add even the safe harbor provisions may be amended mid-year to the extent provided by the IRS in future Internal Revenue Bulletin releases.

The preamble explains that this change will provide the IRS with greater flexibility to develop rules to address special circumstances under which a mid-year change to a section 401(k) safe harbor plan is appropriate, including “an amendment to the plan in connection with a mid-year corporate transaction.” That is welcome news because a common question has been whether an employer could allow new employees who arrived through a corporate transaction could begin participating in the plan immediately, or whether, that type of change would jeopardize the safe harbor status of the plan. It would seem that this type of change should be allowed, as well as other amendments to the plan. It is comforting to see that the IRS appears to be offering more flexibility in this area.

Key Take-Aways for Employers

The final regulations provide two key take-aways for employers. First, they should decide whether to issue new or modified safe harbor notices. As mentioned at the start of this blog, employers whose plans provide safe harbor non-elective contributions should consider issuing a new notice that adds that the plan could be amended mid-year to reduce or eliminate these contributions. A plan that provides safe harbor matching contributions, however, should be able to wait until next year to include this type of statement in its safe harbor notice.

Second, it appears that the IRS is becoming more flexible in allowing mid-year amendments to safe harbor plans that will not cause these plans to lose safe habor status. Still, if employers are contemplating a mid-year amendment to their safe harbor plans, they should talk to counsel before proceeding. Although the IRS is becoming more flexible, the guidance is not always entirely clear with respect to certain types of amendments. Until further guidance is issued, employers should proceed carefully.