More Analysis of the Proposed Regulations to Suspend Safe Harbor Nonelective Contributions

In mid-May we discussed how proposed Treasury Regulation [REG–115699–09] – Suspension or Reduction of Safe Harbor Nonelective Contributions provides for the Suspension or Reduction of Safe Harbor Nonelective Contributions Mid-Year for both a traditional safe harbor plan and a qualified automatic contribution arrangement (QACA). The proposed regulations provide similar guidance to eliminating the safe harbor nonelective contributions that already exist for Mid-Year Safe Harbor Matching Contribution Changes. Unlike reducing or eliminating the match, the nonelective contribution may only be eliminated if there is a substantial business hardship. Needed Relief for Suspension of Safe Harbor Nonelective Contributions Arrives—With a Catch raises concerns with the fourth substantial business hardship requirement that "it is reasonable to expect that the plan will be continued only if the waiver is granted":

While it appears likely that many plan sponsors would meet the first three criteria during these turbulent economic times, the last factor may not apply in many cases and, without further guidance, we do not know how much weight the IRS will give it. In fact, in a recent newsletter discussing the May guidance, the IRS does not list this last factor at all. Perhaps the IRS will provide further insight on the importance of this last factor in connection with finalizing this guidance.

Proposed Regulations on "Exiting" Safe Harbor Nonelective Issued discusses how the proposed regulations can be combined with the Maybe Nonelective Notice to provide more employer discretion:

Therefore, if the employer wishes to have total discretion regarding the use of the safe harbor nonelective during the plan year, the employer must use the maybe notice, which permits the employer total discretion whether to commit to the safe harbor nonelective during the plan year. The new proposed exiting rules thus complement and work in tandem with, but do not replace, the maybe notice option. The IRS has requested comments on the proposed regulations, and is considering imposing an additional requirement as to the minimum notice content requirements, that would include a specific requirement to describe the possibility of exiting the safe harbor contributions (which, under the proposed regulations, now would apply both to the safe harbor match and the safe harbor nonelective).

It also notes how, if certain requirements (substantial business hardship, acquisition or disposition) are met, plan termination will allow the plan to maintain its safe harbor status in the year of termination, how the IRC Section 401(a)(17) compensation limit ($245,000 in 2009) must be prorated as of the date of the reduction or elimination of the contribution (potentially creating problems for plans that fund contributions throughout the year), and how the plan will face Potential Top Heavy Testing Issues (which, combined with the added nondiscrimination testing requirements of no longer being a safe harbor, could add additional administration expenses).

Sponsors were eligible to begin relying on the proposed regulations for amendments adopted after May 18. You should note the amendment requirement and how it is not consistent with the traditional end of the plan year amendment discretionary rules.