Safe Harbor 401(k) Plan - Employer Wants to Suspend Match for One Subsidiary or Division

[rocknrolls2]

Company X maintains a safe harbor 401(k) plan in which the matching contribution is structure to satisfy the safe harbor of Code Section 401(k)(12) (i.e., 100% match on elective deferrals up to 3% of compensation and 50% match on elective deferrals greater than 3% but not in excess of 5% of compensation). Employer X wants to amend the safe harbor 401(k) plan to allow for suspension of the safe harbor match by one or more subsidiaries or divisions. While it is clear that, subject to complying with the rules set forth in the regulations including the content and timing of the notice requirement and any supplemental notice requirement as applied to all participants, can the employer limit the suspension to one subsidiary and not lose safe harbor status?

[ETA Consulting LLC]

No. It "may" be doable had the subsidiary been in a separate plan under its own plan document. Right now, you're basically asking if the Employer may arbitrarily break the plan employees down into various groups and amend the plan to exclude a certain group (including NHCEs) from the safe harbor match while still maintaining the safe harbor provisions for the other groups. That would undermine the safe harbor requirement of providing it to all NHCEs eligible to defer.

Good Luck!

[rocknrolls2]

Thank you for your response. What if the employer decided not to change anything in its safe harbor 401(k) plan but it instead wants to take the account balances of the employees in the subsidiary and spin them off to a newly established 401(k) plan that will be subject to ADP/ACP testing? Assuming that the plan passes coverage and the ADP/ACP tests are satisfied, would this be a permissible alternative? If this approach is taken, do the rules on the mid-year changes and the timing of supplemental notices applicable to safe harbor plans in general apply for this purpose?

[rocknrolls2]

In addition to the above questions is the question of whether the remaining employers in the safe harbor 401(k) plan can still utilize the safe harbor, both in the plan year in which the spinoff occurs and going forward.

[Kevin C]

The SH mid-year amendment rules prohibit a mid-year amendment that makes someone who was eligible no longer eligible. See Notice 2016-16, III D 2.

Before we had that guidance, I think it would have fallen under the category of suspending or reducing the SH contribution under 1.401(k)-3(g), which means no safe harbor for the year of the amendment.

[rocknrolls2]

Thank you for your response, Kevin C. I was also of the view that the plan would not remain a safe harbor plan in the year of the spinoff. Did you want to provide a response to my initial question of whether the spinoff could be done? If you respond, I will provide you with my thoughts on this issue.