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Safe Harbor Contributions: Changes to Mid-Year Suspension Rules

Posted on Apr 08, 2014 by  in Changes in the Law: What You Should Know, Retirement Plans for Business

The IRS released new regulations in November of last year that changed the rules for suspending safe harbor contributions during the middle of the plan year.  In general, employers cannot make changes that affect the safe harbor contribution during the plan year; such changes must be made before the beginning of the plan year in which they will take effect.  However, in limited circumstances, employers can suspend or reduce their safe harbor contribution during the current plan year.

The new regulations changed the standard for mid-year suspension of safe harbor non-elective contributions to “operating at a loss” for the plan year – a somewhat less stringent standard than was required in the past.  Also, starting in 2015, the new regulations impose the same “operating at a loss” standard on plans using safe harbor matching contributions.  

Perhaps the most significant change from the new regulations is the introduction of an alternative to the “operating at a loss” rules.  Under the alternative approach, an employer may suspend the obligation to make safe harbor matching or non-elective contributions during the plan year for any reason as long as the safe harbor notice distributed before the plan year contains a statement indicating that the employer may amend the plan to suspend the safe harbor contributions and that the suspension, if any, will not be effective sooner than 30 days after the participants receive a supplemental safe harbor suspension notice.

It is worth noting that the employer will still have to provide the safe harbor contribution through the date that the plan is amended to remove the safe harbor features.  Also, the plan will be subject to ADP and ACP testing for the entire plan year.

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