On November 15, 2013, the Internal Revenue Service ("IRS") published final regulations for making mid-year changes to employer matching or nonelective contributions under "safe harbor" 401(k) and 401(m) retirement plans. In general, a safe-harbor plan must be adopted before the beginning of an applicable plan year and must be maintained throughout the plan year. Accordingly, unless otherwise permitted by regulation, a safe-harbor plan may not be amended during a plan year to satisfy another nondiscrimination rule (i.e., actual deferral percentage or actual contribution percentage test, as applicable).
Proposed regulations, which were issued in 2009, permitted mid-year reductions or suspensions of safe-harbor nonelective contributions if an employer established that a "substantial business hardship" (as defined for purposes of the minimum funding requirements) exists. However, the newly released final regulations only require the employer to show that it is operating at an economic loss. Alternatively, under the final regulations, employers do not need to show an economic loss in order to make changes to applicable contributions if participants are notified before the beginning of the plan year that the rate of contribution may be reduced or suspended during the year, and a second notice of an actual change is, in fact, given at least 30 days prior to any reduction. In addition, to make a change, participants must be given the opportunity to modify their plan elections, the plan must satisfy the applicable actual deferral percentage or actual contribution percentage test for the entire year, and the safe-harbor requirements must have been satisfied through the date of the change.
Under the final regulations, an employer maintaining a safe-harbor plan using employer nonelective contributions or employer matching contributions may make mid-year changes to such contributions on essentially the same basis. Regulations issued prior to the proposed regulations only addressed mid-year changes to matching contributions and contained requirements that differed from the final regulations. Furthermore, the final regulations permit the IRS to issue guidance that may set forth additional situations in which a safe-harbor plan may make mid-year changes.
There are important differences in the effective dates with respect to each type of contribution. The final regulations with respect to employer nonelective contributions apply to any amendments made after May 18, 2009 (the date on which the proposed regulations were published). However, amendments made pursuant to the final regulations with respect to safe-harbor matching contributions may only apply to plan years beginning on or after January 1, 2015.