Safe harbor rules issued for non-elective contributions
By Paula Aven Gladych
The Internal Revenue Service has issued its final safe harbor rules for employers facing business hardships.
The agency ruled that companies that operate at a loss can eliminate or reduce non-elective contributions made to Safe Harbor 401(k) plans midyear.
The Safe Harbor 401(k) has been popular among small business owners because it allows them and their highly-compensated employees to make the maximum contribution either tax-deferred or after tax to their Roth 401(k) regardless of income. In exchange for modest contributions to other plan participants on a matching basis, the plan doesn’t have to go through strenuous nondiscrimination testing requirements that apply to standard 401(k) plans.
Prior to this rulemaking, employers had to have a business hardship to suspend or reduce their non-elective contributions to these plans. Now, employers can reduce or suspend their non-elective contributions no matter what their financial condition as long as they let participants know before the beginning of the plan year that their contributions could be reduced or suspended midyear, and give them 30 days’ notice before the suspension or reduction actually takes place.
According to the IRS in its final rules, which were released Nov. 14, the same rules now apply to both safe harbor non-elective contributions and safe harbor matching contributions.
This is a change from previous rules on matching contributions so the changes don’t go into effect until Jan. 1, 2015.
Originally published on BenefitsPro.com