3776 / Can an employer reduce or suspend 401(k) safe harbor nonelective contributions mid-year?
The IRS has issued final regulations that permit a safe harbor nonelective 401(k) plan to reduce or suspend safe harbor contributions mid-year if the plan contains a statement that such action is a possibility and the amendment does not become effective until 30 days after participants receive a supplemental notice of the mid-year amendment.1
The IRS provided COVID-19 relief for safe harbor plan sponsors who acted by August 31, 2020. COVID-19 placed a strain on many business owners, making it difficult for some employers to keep up with mandatory employer matching contributions. Notice 2020-52 allowed plan amendments to reduce or suspend safe harbor contributions to non-highly compensated employees if they were made by August 31, 2020. The plan then became subject to nondiscrimination testing for the plan year.
If the safe harbor contributions being suspended or reduced were nonelective employer contributions (as opposed to matching contributions), the 30-day requirement for supplemental notice was satisfied if the notice was provided by August 31, 2020 and the amendment was adopted no later than the effective date of the suspension or reduction. If matching contributions were reduced or suspended, there was no relief from the 30-day requirement (to give employees time to decide whether to change their own elective contributions).