Tuesday, June 09, 2009

Safe Harbor Relief for Cash Strapped Companies

The IRS issued proposed regulations which would allow 401(k) plan sponsors to reduce or eliminate the safe harbor match, which you were previously required to maintain for 12 months. Sponsors can rely on the proposed regulations until final regs are issued.

Last fall, many plan sponsors who provide safe harbor plans elected to continue the safe harbor match through calendar year 2009. But as the economy has soured, more and more companies have been scrambling to conserve cash, and sought to eliminate the employer contribution (often, but not always, 3% of pay). Normally, the match must be provided for the entire year once it has been announced at the end of the previous year.

Previously, there were two exceptions to the rule: the plan could be amended to reduce or eliminate the match, and the plan could be terminated.

Now, there are three additional methods:
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; and

3) the sales and profits of the industry concerned are depressed or declining.

As always, the Sponsor should consult counsel for further details and interpretations.

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