Benefits & ERISA Law

Over Before It Began: Eliminating 2009 Safe Harbor Match After Notice is Distributed

By Suzanne Wynn

So what happens if you (or your employer) distributed a safe harbor notice last October or November that stated there would be a safe harbor matching contribution in 2009, and now, with the worsening economy, the employer needs to rescind that promise of making a safe harbor matching contribution in 2009. Treas. Reg. 1.401(k)-3(g) and Treas. Reg. 1.401(m)-3(h) permits a safe harbor matching contribution to be changed or eliminated after the safe harbor notice has been distributed.

Treas. Reg. 1.401(k)-3(g) provides this procedure to reduce or eliminate the safe harbor matching contribution:

(g) Permissible reduction or suspension of safe harbor matching contributions. (1) General rule. A plan that provides for safe harbor matching contributions will not fail to satisfy the requirements of section 401(k)(3) for a plan year merely because the plan is amended during a plan year to reduce or suspend safe harbor matching contributions on future elections contributions (and, if applicable, employee contributions) provided that -

(i) All eligible employees are provided the supplemental notice in accordance with paragraph (g)(2) of this section;

(ii) The reduction or suspension of safe harbor matching contributions is effective no earlier than the later of 30 days after eligible employees are provided the notice described in paragraph (g)(2) of this section and the date the amendment is adopted;

(iii) 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 matching contributions to change their cash or deferred elections and, if applicable, their employee contribution elections;

(iv) The plan is amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method described in section 1.401(k)-2(a)(2)(ii); and

(v) The plan satisfies the requirements of this section (other than this paragraph (g)) with respect to amounts deferred through the effective date of the amendment.

Treas. Reg. 1.401(k)-3(g)(2) provides the information which the supplemental notice must contain. It states:

(2) Notice of suspension requirement. The notice of suspension requirement of this paragraph (g)(2) is satisifed if each eligible employee is given a notice (in writing or such other form as prescribed by the Commissioner) that explains -

(i) The consequences of the amendment which reduces or suspends matching contributions on future elective contributions and, if applicable, employee contributions;

(ii) The procedures for changing their cash or deferred election and, if applicable, their employee contribution elections; and

(iii) The effective date of the amendment.

Treas. Reg. 1.401(m)-3(h) contains the same provisions as Treas. Reg. 1.401(k)-3(g) except it refers to the ACP test instead of the ADP test.

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Full post as published by Pension Protection Act Blog on December 09, 2008 (boomark / email).