401(k) Planning in a Down Economy

With the current economic downturn, many employers are faced with the economic reality of being unable to continue the safe harbor matching contribution or non-elective employer contribution for their 401(k) plans. The mid-year termination of a safe harbor matching contribution has been possible but normally not advisable.
The mid-year termination of a non-elective employer contribution has not been possible in the past.

The IRS has recently issued proposed regulations that will allow employers who experience a "substantial business hardship" to terminate their non-elective employer contributions during the plan year. The criteria for determining a substantial business hardship include, but are not limited to, whether or not: (1) the employer is operating at an economic loss; (2) there is substantial unemployment or underemployment in the employer's trade or business; and (3) the sales and profits of the employer's industry are depressed or declining. If the criteria are met, the employer may terminate the non-elective contribution upon amendment of the 401(k) plan, giving the participants 30 days notice and allowing the participants to revise their salary deferral elections. Similarly, the employer may terminate their matching contribution by giving the participants at least 30 days notice, allowing the participants to revise their salary deferral elections, and to amend the plan, if necessary under the provisions of the plan.

A substantial business hardship is not required to terminate a safe harbor matching contribution. In either event, the employer is required to make the safe harbor matching contribution or non-elective employer contribution from the start of the plan year to the effective date of the termination. Please note that the exiting of a safe harbor matching or non-elective employer contribution during the plan year will subject the entire plan year to discrimination testing. This may result in the plan's highly compensated employees over contributing for the year.

If you have any questions or need assistance with a mid-year termination of a safe harbor matching or non-elective employer contribution, I would be glad to discuss this matter with you.

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This publication is for general information only and is not intended as formal legal advice. If you have any questions or need assistance, please contact Curtis & Curtis, P.C.

Curtis & Curtis, P.C. is a full service law firm located in Jackson, Michigan providing superior legal services and advice to individuals, families and businesses throughout mid-Michigan since 1901.