The Internal Revenue Service issued proposed regulations on May 18, 2009 which allow for the suspension or reduction of safe harbor nonelective contributions under certain 401(k) safe harbor plans.


A safe harbor 401(k) plan is a 401(k) plan that requires an employer to make certain levels of plan contributions for nonhighly compensated employees. In exchange, the plan is exempt from the regular 401(k) plan requirement to have annual nondiscrimination testing performed. Employer contributions under a safe harbor 401(k) plan are made in
the form of either matching contributions or nonelective contributions.

In general, a safe harbor 401(k) plan must maintain its status as a safe harbor plan for a full, 12-month plan year. There are, however, two exceptions to this general rule:
• A safe harbor plan may be amended to reduce or suspend safe harbor matching contributions on future employee deferrals for a plan year.

• A safe harbor plan may be terminated during the plan year.


Under the proposed regulations, a plan may also reduce or suspend safe harbor non-elective contributions if the employer sponsoring the plan experiences a “substantial business hardship.” Some factors that are considered in determining whether a substantial business hardship exists are:
• the employer is operating at an economic loss;

• there is substantial unemployment or underemployment in the trade or business and in the industry concerned; and

• the sales and profi ts of the industry concerned are depressed or declining.


Once the existence of a substantial business hardship is determined, the following requirements must be met in order to reduce or suspend safe harbor non-elective contributions for the plan year:
• the plan must be amended before the end of the plan year to permit the reduction or suspension;



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