Involuntary Employer Suspension of Employee Deferrals

[LMOC]

This may seem like a simple question, but as you think about it, more questions come up.

Is an Employer required to notify participants in a Safe Harbor Non-Elective plan that they will no longer take EMPLOYEE Deferrals?

The Employer has not said anything about terminating the plan or the situation of the company.

[Lou S.]

How do you stop taking deferrals in a 401(k) plan?

Do they want to amend from 401(k) to PS?

You couldn't do this in safe harbor plan as it would be a mid-year amendment, assuming this is a calendar year plan.

Unless they are terminating the plan you couldn't make this effective prior to the start of the next plan year.

[LMOC]

I know this is weird. The question came to me from a third party with very little information from the employer. My initial response was what are they trying to do? I said, if they are terminating the plan or the safe harbor contribution, yes notices are required. But, they didn't know if that was what they were doing.

Let's say if it wasn't a Safe Harbor Plan, the Plan was not terminating and they were not going to a PS Plan, what is the responsibility of the employer if they decided to stop taking employee deferrals?

Another option I just thought about was freezing the plan if they want to stop elective deferrals, but then that freezes everything.

Thanks so much for your help!

[Lou S.]

If the employer just stops taking deferrals they aren't follwing the terms of the plan. Very likely the employer is having financial dificulties.

[BG5150]

A 401(k) plan is just a PSP with a 401(k) provision.

Why can't you amend a "401(k) plan" to no longer offer deferrals.

Mid-year of a safe harbor plan notwithstanding.

[LMOC]

Thanks so much for your help, BG5150 and Lou S!

[My 2 cents]

Not a 401(k) practitioner, so I may be unaware of significant reasons to the contrary, but in the absence of employer matches, wouldn't employee deferrals be virtually free to the employer? Why would an employer have to stop accepting employee deferrals (especially from non-HCEs)?

[Kevin C]

If the termination of a safe harbor 401(k) plan is in connection with a 410(b)(6)© transaction or a substantial business hardship, the advanced notice requirement in the regulations does not apply. 1.401(k)-3(e)(4).

If they want to stop deferrals, but continue the plan, I agree the regulations prevent that. I can't imagine why anyone would want to do that, but it is prohibited.