Dropping 401(k) safe harbor in mid-year

[Guest RARogers]

Can you drop the 401(k) safe harbor contributions in mid-year - suppose it was too expensive (because your business was doing poorly)? The change would apply only after participants were notified of the change.

I know that the IRS Notice says that the contributions have to be made for the entire year. But is that just a condition for the safe harbor, or is it something more menacing?

Do you think that the employee notice to participants about the safe harbor, and the plan language, would somehow create an accrued benefit right for the safe harbor contributions for the rest of the year?

I would think under normal accrued benefit concepts that the notice to employees (with the accompanying plan language) would NOT create an accrued benefit right for the rest of the year. You can always suspend accruals in mid-year (provided the proper procedures are followed) so that you wouldn't have to provide a benefit based on compensation after the suspension date.

You also have the argument that you could always terminate the plan in mid-year.

But others differ with this analysis. Has the IRS said anything on this?

Your comments would be appreciated.

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