Notice Requirements

[Guest nmyers]

We currently have an Employer who has paid a generous match of 150% on the dollar up to 5% for years. The Employer has definitely been affected by the economy and can no longer afford this contribution. They match each payroll and want to amend the matching contribution starting in July to a discretionary matching contribution. We drafted an amendment for the change, we drafted an SMM, as well as Supplemental Notice for Employees. We informed the employees that this would not affect the accrued benefit they've already received or were entitled to prior to July 1, just the match going forward.

This is not a safe harbor plan. Is it necessary to notice the employees, when just changing from a fixed match plan to a discretionary plan?

[Guest dbvail]

If the match were "hard coded" in the document or not, you have taken all the steps to go on with a new formula. At least as I can see.

[Guest nmyers]

If the match were "hard coded" in the document or not, you have taken all the steps to go on with a new formula. At least as I can see.

I think we're pretty much covered as far as the amendment and the SMM goes. I guess my only question is "are we required to send a notice of the change to the participants?" The only sites that I can find that say its required is in a safe harbor situation 1.401(k)-3(g).

I've worked with other companies in the past, who believed that noticing the participants is proper due diligence if the Employer was lowering or taking away a benefit, but I wasn't sure if it was REQUIRED or just a best practice?

[401 Chaos]

I guess I'm confused. Is the question whether you have to give notice at all or whether you have to follow the safe harbor notice procedures? Your email suggests that you already have given notice or were prepared to do so.

[Guest nmyers]

I guess I'm confused. Is the question whether you have to give notice at all or whether you have to follow the safe harbor notice procedures? Your email suggests that you already have given notice or were prepared to do so.

Sorry, I see the confusion. This is NOT a safe harbor plan. Out of habit, I have already drafted a supplemental notice to employees to inform them that the fixed matching contribution is being amended to a discretionary contribution.

It would probably be a good idea to distribute the supplemental notice, but my question is, is there a regulation or anything in the Code that says it's required for plans that are NOT safe harbor to send a 30-day notice to participants that a benefit (match) is being lowered or is no longer offered by the plan?

[401 Chaos]

Thanks. That was what I assumed. I am not sure if there is a clear notice requirement there or not but seem to recall that there was some prior discussion on this board about whether you could really cut back on the match mid-year. I think there may be particular concerns with when the match was hard wired in the plan and seemingly communicated to participants as a fixed contribution and whether some IRS agents thought you could reduce the match amount. I don't really agree with those concerns / arguments (particularly in light of ability to drop match in safe harbor plan) but when I was researching in the past I did not find as much clear guidance as I had expected or hoped. At any rate, even if there is no requirement to notice employees in a non-safe harbor arrangement, I would really not consider that option. If the match is reduced or eliminated for economic reasons / to avoid worse cuts, etc., I could understand that as an employee. However, if you changed the match amount without telling me, I would be livid, particularly if part of my basis for contributing to the 401(k) plan was to receive the match. Even if I would continue elective deferrals, I would be very upset. There is an article touching on these issues in the current (June) newsletter / update that accompanies the Thompson 401(k) Handbook binder. It does not appear to expressly suggest there is a clear notice requirement but does encourage advance notice to employees so that they can adjust deferrals if they desire.

[John Feldt ERPA CPC QPA]

SunGard Relius had a short comment on this:

http://www.relius.net/News/TechnicalUpdates.aspx?ID=433

2. If an employer eliminates a match (fixed or discretionary) in a traditional 401(k) plan must it provide a notice to the participants?

No. The regulations only require safe harbor 401(k) plans to provide a notice to employees upon reducing or eliminating a match formula during the plan year. Nevertheless, the employer may want to provide a notice to alert the employees to the change so they can modify their deferral elections if they wish. Of course, the amendment will need to be reflected in a summary of material modifications (SMM). However, the SMM is not due until 210 days after the close of the plan year in which the employer makes the amendment.