Litigation

IRS allows "safe harbor" plan cutbacks

By John Walch

Recently, the IRS proposed amendments to the 401(k) "safe harbor" plan regulations.  A "safe harbor" plan is one that complies with certain mandatory employer contribution, vesting and notice requirements.  Safe harbor plans are not subject to many of the discrimination rules that apply to 401(k) plans.  One condition of safe harbor status is the employer must make a mandatory matching contribution to all plan participants that defer, or a 3% of pay contribution on behalf of all eligible employees.  Previous IRS rules allowed employers to drop out of the matching arrangement mid-year.

Until the recent proposal, the IRS refused to allow employers to drop out of the 3% safe harbor arrangement mid-year.  Now, in recognition of the severe economic hardship most businesses are facing, the IRS proposes to allow employers to eliminate the safe harbor contribution mid-year.  The proposal requires the employer to provide notice to plan participants at least 30 days before the contribution will cease to allow them to make any changes to their deferral elections.  The plan will then have to comply with the discrimination requirements for the entire year, not just the post-change period.

The IRS is accepting comments on the proposal through August 18, and expects to issue final regulations shortly thereafter, which allow plan amendments back through May 18.  Employers therefore do not need to wait for the final regulations to implement the proposal.

Full post as published by Northwest Business Litigation Blog on August 06, 2009 (boomark / email).