Vision Payroll

May 25, 2009

Proposed Regulations Allow Employers to Suspend 401(k) Contributions

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.

October 31, 2008

Question of the Week: How Do I Fix an ADP Failure?

This week’s question comes from Dan, a business owner: I just found out that I had an ADP failure. What can I do to fix it? Answer: ADP failures are unfortunately too common, but Vision Payroll can easily help fix them. ADP, or Actual Deferral Percentage, and ACP, or Actual Contribution Percentage, are two tests that must be passed by many 401(k) retirement plans. These tests serve to limit the benefits provided to highly compensated employees (HCEs) in relation to the benefits provided to non-highly compensated employees (NHCEs).


In the ADP test, the average salary deferral of each group is calculated and compared to the other. The ADP of the HCEs may not exceed the ADP of the NHCEs by 1.25% or the lesser of the average NHCE percentage plus 2% or the average NHCE percentage times two. If it does, the plan has an ADP failure.


There are various methods for correcting an ADP failure depending on how quickly the failure is discovered. Unfortunately, many companies are unaware of the problems caused by ADP failures until it’s too late. Generally, if too much time has elapsed, fixing an ADP failure will become more expensive. Vision Payroll can work with your plan administrator to fix the ADP failure and provide solutions to make sure there are no ADP failures in your future.

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