Safe Harbor Elimination

We have not run into any safe harbor plans that have wanted to suspend safe harbor contributions.

An accountant stopped by the other day and mentioned he had a small client (about 8 participants) that did not make their 2016 safe harbor contribution and don't want to fund it.

I explained that it was my understanding that if the company had financial problems and they could prove it, they may be able to provide a 30 day notice to participants and then not make any safe harbor contribution from that point (after the 30 days) to the end of the year. But I believe they are responsible for making the safe harbor contribution for the time up to that point. In addition, I think the plan then needs to provide top heavy minimums and run the ADP test for the year. 

He seemed to think that if the company could prove it had declining sales and business for the past few years, that they could simply not fund the safe harbor contribution.

Has anyone heard of this?

They are a going concern but has anyone heard of this for a company that was in very bad financial shape?

Thanks. 

Very funny.

Ask him to prove it.

See reg. 1.401(k)-3(g)(1)

An employer may suspend or reduce safe harbor contributions mid-year if the plan is amended during the plan year, and provided they meet certain other conditions. Obviously it is too late to amend for 2016 so the employer will have to make the contributions.

EDIT: Next paragraph is incorrect. Disregard.

For 2017, if the employer is operating at an economic loss as defined in section 412(c)(2)(A) then they may suspend the safe harbor contribution for the remainder of the year, provided they amend the plan on a timely basis.

If one relies on 26 C.F.R. § 1.401(k)-3(g), doesn’t the reduction or suspension of safe-harbor contributions apply no earlier than 30 days after eligible employees are provided the -3(g)(2) supplemental notice that explains the plan amendment?

Re-reading the reg I agree that the 30 day period is required regardless of whether the employer is experiencing an economic loss.

1.401(k)-3(g)(1)(i)(A) states:

Quote

(A) In the case of plan years beginning on or after January 1, 2015, the employer either -

(1) Is operating at an economic loss as described in section 412(c)(2)(A) for the plan year; or

(2) Includes in the notice described in paragraph (d) of this section a statement that the plan may be amended during the plan year to reduce or suspend safe harbor matching contributions and that the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension;

which would seem to imply that the 30 day wait is only required if the reduction or suspension is happening in accordance with a provision in the annual notice. However 1.401(k)-3(g)(1)(i)(C) goes on to say:

Quote

(C) The reduction or suspension of safe harbor matching contributions is effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the supplemental notice described in paragraph (g)(2) of this section;

It seems a little odd that the regulation would specify 30 days in (A)(2) but not (A)(1) even though it applies to both. But such is life.

You've probably gathered by now that the accountant is wrong. In addition to the safe harbor rules, I'll point out that the safe harbor contribution is required under the terms of the plan and any attempt to amend to reduce or eliminate the safe harbor contribution retroactively would violate 411(d)(6).  Not making the safe harbor contribution timely would also be an operational failure.  The only way I've heard that you might be able to get out of safe harbor contributions already accrued is through a bankruptcy court ruling.  I've never had the situation happen, so I don't know if that actually works.

We had an attorney client several years back who refused to deposit two years of safe harbor contributions.  A participant filed a complaint with the DOL and they got involved. I don't know what they told the owner, but he deposited the amounts owed so the plan could be terminated.