The proposed rules would give employers an alternative to terminating their employee retirement plans if they felt they needed temporarily to reduce or suspend their non-elective contributions to the plans, under rules similar to those governing matching contributions.
The proposed regulations would allow for the reduction or suspension of safe harbor nonelective contributions under rules generally comparable to the provisions relating to the reduction or suspension of safe harbor matching contributions.
Under the proposed rules, a plan that reduces or suspends safe harbor nonelective contributions will not fail to satisfy section 401(k)(3), provided that:
- all eligible employees are provided a supplemental notice of the reduction or suspension;
- the reduction or suspension of safe harbor nonelective contributions is effective no earlier than the later of 30 days after eligible employees are provided the supplemental notice and the date the amendment is adopted;
- eligible employees are given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of the safe harbor nonelective contributions to change their cash or deferred elections and, if applicable, their employee contribution elections;
- the plan is amended to provide that the average deferral percentage (ADP) test will be satisfied for the entire plan year in which the reduction or suspension occurs, using the current year testing method;
- the plan satisfies the safe harbor nonelective contribution requirement with respect to safe harbor compensation paid through the effective date of the amendment.
The proposed regulations would also provide that the supplemental notice requirement is satisfied if each eligible employee is given a notice that explains:
- the consequences of the amendment reducing or suspending future safe harbor nonelective contributions;
- the procedures for changing cash or deferred elections and, if applicable, employee contribution elections;
- the effective date of the amendment.
Timeframe for Adoption
The IRS notes that the proposed regulations would further provide that these same rules also apply to safe harbor plans under §1.401(m), except that the plan must be amended to provide that the ACP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method.
Because the reduction or suspension of safe harbor contributions can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted, an employer that wants to reduce or suspend safe harbor contributions during a year could not implement this change by adopting the amendment at the end of the plan year. The proposed rule also says that a plan that is amended during the plan year to reduce or suspend safe harbor contributions (whether nonelective contributions or matching contributions) “must prorate the otherwise applicable compensation limit under section 401(a)(17) in accordance with the requirements of §1.401(a)(17)-1(b)(3)(iii)(A).”
The IRS also notes that “a plan that is amended to reduce or suspend safe harbor contributions is no longer a plan described in section 401(k)(12), 401(k)(13), 401(m)(11), or 401(m)(12) for the entire plan year,” and that, accordingly, “such a plan is not described in section 416(g)(4)(H) and, thus, will be subject to the top-heavy rules under section 416.’
The regulations are proposed to be effective for amendments adopted after May 18, 2009.
The principal authors of these regulations are Dana Barry, William Gibbs, and Lisa Mojiri-Azad, Office of Division counsel/associate chief counsel, Tax Exempt and Government Entities.
Call for Comments
Before these proposed regulations are adopted as final regulations, consideration will be given to any written (one signed and eight copies) or electronic comments that are submitted timely to the IRS. In fact, the IRS and Treasury Department specifically request comments on the clarity of the proposed rules and how they can be made easier to understand. Written or electronic comments must be received by June 17.
A public hearing has been scheduled for September 23 at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC. Persons who wish to present oral comments at the hearing must submit written or electronic comments and submit an outline of the topics to be discussed and the amount of time to be devoted to each topic (a signed original and eight copies) by August 19, 2009. A period of 10 minutes will be allotted to each person for making comments.
The regulation is scheduled for publication in the May 18 Federal Register.