On November 14, 2013, the Internal Revenue Service issued final regulations modifying some of the conditions for making mid-year changes to employer matching or nonelective contributions under plans that utilize the nondiscrimination safe harbors under sections 401(k) and/or 401(m) of the Internal Revenue Code. These new regulations make some changes to the existing regulations, and to the proposed regulations that had been issued in 2009.
Before this new regulation, an employer maintaining a safe-harbor plan using employer nonelective contributions could not reduce or eliminate those contributions midyear – such a change could only be made with respect to employer matching contributions. The regulation removes the distinction between the two types of safe-harbor compliance, and allows either type of contribution to be reduced or eliminated during the year, subject to all of the same requirements. The difference between the two is the effective date of the change. With respect to the new authority permitting reduction of employer nonelective contributions, the amendments are currently effective, and apply to plan amendments made after May 18, 2009 (the date on which the proposed regulation was published); with respect to modifying the rules applicable to employer matching contributions, the amendments are made applicable to years beginning after December 31, 2014, as they impose new conditions on the employer's ability to make changes.
Previously, the proposed regulation would have changed the existing rule to require that, in order to qualify to make a change, the employer would have had to establish the existence of a "substantial business hardship," as that term is used for purposes of the minimum funding requirements. That condition was replaced in the final regulation with the employer having to show merely that it is operating at a loss (which is only one of several elements of the "substantial business hardship" test). Alternatively, even that requirement can be waived entirely if participants are notified before the beginning of the year that the rate of contribution may be reduced or suspended during the year, and if another notice is actually provided 30 days prior to any reduction. The remaining conditions are the same as are contained in the current regulation, i.e., participants must have the opportunity to change their plan elections, the plan must satisfy the ADP test (or ACP test, as applicable) for the entire year on a current-year basis, and the safe-harbor requirements must have been satisfied through the date of the change.
Administratively, the regulation provides that the Internal Revenue Service may prescribe additional rules in this area by guidance published in the Internal Revenue Bulletin, such as Revenue Rulings or Revenue Procedures, rather than having to amend the regulation.
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