On May 18, 2009, the Internal Revenue Service (IRS) published at 74 FR 23134, REG-115699-09, Suspension or Reduction of Safe Harbor Nonelective Contributions. The proposed regulations take effect May 18, 2009 and may be relied upon by taxpayers until final regulations are issued.

Under §401(k)(12) and §401(k)(13) of the Internal Revenue Code of 1986 (IRC), plans can avoid an IRC §401(k)(3) actual deferral percentage (ADP) failure through the use of a design based safe harbor method that requires specified qualified matching contributions (QMACs) for eligible non-highly compensated employees (NHCEs). The proposed regulations would allow employers that incur a substantial business hardship (similar to one described in IRC §412(c)) the option of reducing the safe harbor contribution during a plan year, eliminating the safe harbor contribution during a plan year, or terminating the employer’s safe harbor plan.

The factors to be taken into account in determining if there is a substantial business hardship include determining whether or not:

1. The employer is operating at an economic loss,
2. There is substantial unemployment or underemployment in the trade or business and in the industry concerned,
3. The sales and profits of the industry concerned are depressed or declining, and
4. It is reasonable to expect that the plan will be continued only if the waiver is granted.

The proposed regulations also require the following:

1. Thirty days notice to eligible employees of the suspension or reduction (the proposed regulations provide the required information to be provided to eligible employees);
2. Reasonable opportunity for employees to change their cash or deferred elections and their employee contributions elections;
3. Amendment of the plan to provide that the ADP test will be satisfied for the year of change of the safe harbor contribution; and
4. That the plan satisfies the safe harbor nonelection contribution requirement through the date of the amendment.

The IRS will hold a public hearing on the proposed regulations on September 23, 2009. Contact Vision Payroll if you have any questions on REG-115699-09.