Theresa Borzelli, a partner in our Roseland, New Jersey office provided me with the following:

On May 18, 2009, the IRS issued proposed regulations that will allow employers with safe harbor 401(k) plans who incur a substantial business hardship to reduce or suspend the safe harbor non-elective contribution. Prior to these proposed regulations, only the safe harbor matching contribution could be reduced or suspended as an alternative to terminating the plan, but the only way to suspend a safe harbor non-elective contribution was by terminating the plan.

The IRS is requesting comments by August 17 with a public hearing scheduled for September 23. However, plan sponsors may rely on the proposed regulations. Should the final regulations be more stringent than the proposed regulations, the more stringent regulations will be prospective only.

What It Means to Plan Sponsors

A Plan Sponsor with a safe harbor 401(k) plan utilizing the non-elective contribution design wishing to suspend or reduce contributions must:

• Incur a substantial hardship as described in IRC§ 412(c);
• Notify all eligible employees of the reduction or suspension at least 30 days prior to the effective date;
• Provide employees with a reasonable opportunity to change their contribution election within a reasonable period of time after receiving the notice;
• Amend the plan to provide that the ADP test will be satisfied for the entire plan year in which the suspension or reduction occurs using the current year method; and
• Test that the plan satisfies the safe harbor non-elective contribution with respect to compensation paid up to the effective date of the amendment.

The amendment must be adopted after May 18, 2009, and the suspension can be effective no earlier than the later of 30 days after the notice is provided to all eligible employees and the date the amendment is adopted.

The Notice

The notice requirement is satisfied if each eligible employee is given a notice that explains:
• The consequences of the amendment,
• The procedures for changing elective deferral elections and
• The effective date of the amendment.

Bottom line: Before you do anything, you want to determine the impact of suspending/reducing the non-elective contribution on your top heavy status. You could find yourself eliminating the safe harbor non-elective contribution only to be faced with making a top heavy contribution. At the same time, determine if you can pass the nondiscrimination tests on a current year basis.

What Should You Do Now?

1. Work with counsel to determine if you can satisfy the substantial business hardship requirements.
2. Determine if you will be subject to the top heavy minimum contribution.
3. Determine if you will satisfy the ADP/ACP tests using the current year method.
4. Ensure that you make the non-elective contribution for the period up to the effective date of the amendment including pro-ration of compensation.
5. If you decide to utilize the proposed regulations:
a. Draft and distribute the notice to participants,
b. Amend your plan,
c. Perform nondiscrimination testing and
d. Perform top heavy testing.