Employers wishing to reduce or eliminate a matching contribution during the middle of a plan year must be careful in assessing whether this is possible for their plan. Even where it is possible, there may be special requirements that must be met in order to do so. Reducing or eliminating a matching contribution where it is not eligible to do so, or failing to follow the necessary requirements can result in a qualification failure that requires a potentially expensive correction down the road.The first consideration is whether the matching contribution is a non-safe harbor or a safe harbor formula.
Modifying or Eliminating Non-Safe Harbor Matching Contributions Mid-Year
The first step in analyzing how a non-safe harbor matching contribution can be reduced or eliminated is to determine whether such action would result in a cutback of an accrued benefit and what operational issues arise. If there are no cutback or operational issues, matching contributions may be modified or eliminated prospectively with due consideration to fiduciary obligations to notify participants during a reasonable period in advance about information that may affect their decision-making, employee relations issues and any other contractual obligations of the employer. While there may be no specific notice requirement, it is recommended that the changes are effectively communicated to the affected employees in writing and in accordance with generally accepted procedures for providing plan notices. In certain cases, a plan amendment may be required, for example, where the plan provides a required true-up at the end of the year.
Modifying or Eliminating Safe-Harbor Matching Contributions Mid-Year
If a plan is not terminating, the employer may reduce or suspend a safe-harbor match during the year if (a) the employer (including ALL related employers) is operating at an economic loss, or (b) the safe harbor notice provided prior to the beginning of the year stated the employer may suspend or reduce safe harbor contributions with a 30 day or more notice to employees.
Supplemental notice must be provided describing change, effective date, and procedures for modifying deferral election.
Plan must be amended for the suspension or reduction with an effective date 30 days after supplemental notice is provided.
Plan must provide a reasonable opportunity for employees to change their deferral elections.
Plan must be amended to provide for ADP/ACP testing for entire year. This is true even if the plan is changing from one safe harbor formula to another because a uniform formula was not in effect for the entire year.
Safe harbor requirements must be satisfied through the effective date of suspension or reduction.
Exceptions for Certain Terminating Safe Harbor 401(k) Plans
If a safe harbor 401(k) plan is terminating on account of a 410(b)(6)(C) business transaction or substantial business hardship(meaning operating at an economic loss, or there is unemployment or underemployment, or sales and profits are depressed), then the plan will continue to be a safe harbor 401(k) plan for the final short plan year.