Suspend EE and ER Matching Contributions To 401k Plan

[Guest ROB VIDOVICH]

An Employer adopted a safe harbor 401k plan last year. Employer is currently going through some financial problems in which Employer is having a hard time funding the employer match.. Employer does not want to terminate plan. They only want to suspend all contributions for about 6 months to 1 year...

Can this be done for this period of time without having to amend or terminate the plan?????? If so, would the employer have to send a notice to interested parties other than the plan participants????

Please let me know if there is anything else I should know about, regarding notifications or any compliance issues.....

[Mike Preston]

What does the Safe Harbor notice to ee's say? Is it the match safe-harbor, or the er contribution safe harbor? If the latter, does it talk about committing at the end of the year or at the beginning?

[Guest ROB VIDOVICH]

It's a safe harbor matching contribution 100% on 3% and 50% on next 2%.....

This is why they want to suspend all contributions so they do not have to match the deferrals....

[Mike Preston]

I think they can amend the plan to provide that the match will no longer apply after a certain date. I think the 'cost' is that the plan loses reliance on the safe harbor for the year where the amendment is made. As a practical matter I'd recommend that the plan sponsor ensure that particpants can modify their elections as of the date that the match will no longer be made. If this requires an amendment to the plan to accomplish, make that part of the amendment to cease matching contributions.

[R. Butler]

See IRS Notice 2000-3, Part III, Q&A 6. It answers this exact question.

[mbozek]

Since IRS allows termination of a DC plan on account of financial hardship of employer, employer contributions can be suspended by board action. Plan will have to be tested under ADP and ACP rules for plan year.

[Mike Preston]

Here is the text of that Q&A:

Q-6. May a plan that uses the 401(k) safe harbor matching contribution method suspend matching contributions on future elective and employee contributions during a plan year and instead use the current year ADP (and, if applicable, ACP) testing method for the plan year?

A-6. A plan that uses the 401(k) safe harbor matching contribution method will not fail to satisfy section 401(k) (or section 401(m)) for a plan year merely because the plan is amended during the plan year to reduce or eliminate matching contributions, provided:

(1) A supplemental notice is given to all eligible employees explaining the consequences of the amendment and informing them of the effective date of the reduction or elimination of matching contributions and that they have a reasonable opportunity (including a reasonable period) to change their cash or deferred elections and, if applicable, their employee contribution elections;

(2) The reduction or elimination of matching contributions is effective no earlier than the later of (i) 30 days after eligible employees are given the supplemental notice and (ii) the date the amendment is adopted;

(3) Eligible employees are given a reasonable opportunity (including a reasonable period) prior to the reduction or elimination of matching contributions to change their cash or deferred elections and, if applicable, their employee contribution elections;

(4) The plan is amended to provide that the ADP test and, if applicable, the ACP test will be performed and satisfied for the entire plan year using the current year testing method; and

(5) All other safe harbor requirements are satisfied through the effective date of the amendment.