During the economic downturn associated with the COVID-19 pandemic, some 401(k) plan sponsors may be considering a mid-year reduction or suspension of matching contributions or nonelective contributions to their 401(k) plans as a cost-saving measure. Generally, whether the matching or nonelective contributions may be reduced or suspended will depend on the specific terms of the plan. In addition, in the case of a plan that is intended to be a safe harbor plan under sections 401(k) or 401(m) of the Internal Revenue Code of 1986 as amended (the “Code”), the Code imposes particularly restrictive rules limiting mid-year changes. The following summarizes steps that a plan sponsor must take to reduce or suspend matching or nonelective contributions to its safe harbor plan during the plan year without jeopardizing the plan’s tax-qualified status.
In order for a plan to be a basic safe harbor plan under sections 401(k)(12) or 401(m)(11) of the Code or a qualified automatic contribution safe harbor plan under sections 401(k)(13) or 401(m)(12) of the Code, an employer must make a specified level of matching contributions, or alternatively, a specified level of nonelective contributions, to the plan. In addition, an employer must provide in advance of the plan year a “safe harbor notice” of the matching contributions or nonelective contributions, as applicable (but see SECURE Act change below), and the plan must satisfy certain vesting requirements. If these requirements are satisfied, the plan will be treated as satisfying the actual deferral percentage (ADP) and, with respect to matching contributions, the actual contribution percentage (ACP) nondiscrimination tests that normally apply to 401(k) plans. (We refer hereinafter to a 401(k) plan that is intended to satisfy the safe harbor rules as a “safe harbor plan,” and the matching contributions or nonelective contributions used to meet the safe harbor requirements as “safe harbor contributions.”)