Mid-year Suspension of Safe Harbor Contributions
March 26, 2020
Can I suspend the safe harbor contribution after the year begins?
Yes, a sponsor can suspend the safe harbor contribution if prerequisites are satisfied and the terms of the plan permit the suspension.
What are the prerequisites?
There are two prerequisites; you must satisfy one.
Option 1: The safe harbor notice distributed before the beginning of the plan year had to include a statement that the sponsor may amend the plan during the plan year to suspend or reduce the safe harbor contributions.
Option 2: The sponsor determines it is operating at an economic loss as defined in Internal Revenue Code (IRC) 412(c)(2)(A).
Note: Neither IRC 412(c)(2)(A) or regulations define what ‘operating at an economic loss’ means. It seems reasonable that it means the sponsor’s expenses exceed its revenue.
How do I suspend the safe harbor contribution?
In order to suspend the safe harbor contribution, you are required to:
- Provide a supplemental notice to all eligible employees explaining the consequences of amending the plan, the procedure by which an employee may change his or her deferral election, and the effective date of the amendment; and
- Amend the plan document to reduce or suspend the safe harbor contribution and to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method. The earliest that the amendment can be effective is 30 days after the employees are provided the supplemental notice
When can I suspend the safe harbor contribution?
You can suspend the safe harbor contribution as of the later of the date the amendment is adopted or 30 days after providing the supplemental notice to employees.
What are the consequences of suspending the safe harbor contribution?
A permitted change is not retroactive. For instance, if a mid-year change is effective May 1, then the applicable safe harbor contribution must be paid to the plan for the period of January 1 through May 1. The ADP and ACP nondiscrimination tests must be performed for the plan year using compensation, deferrals, and matching contributions for the entire plan year.
By suspending the safe harbor contribution, a plan loses the top heavy minimum allocation requirement exemption. Generally, a defined contribution plan is top heavy if the account balances for Key Employees exceed 60% of the total account balances for all participants.
Without this top heavy minimum allocation requirement exemption, the sponsor of a top heavy plan may be required to make a minimum contribution for all non-Key Employee participants who are employed on the last day of the year. The minimum contribution amount is generally 3% of compensation for the year.
Can I restart the safe harbor contribution later in the year?
- You cannot restart a matching safe harbor contribution during the year.
- You can start a non-elective safe harbor contribution as late as 30 days prior to the end of the year.
Please contact the professionals at Gilliam Bell Moser LLP for further guidance