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Reducing or Eliminating Safe Harbor 401(k) Contributions

Can employers reduce or eliminate their safe harbor contribution?
Yes, this is possible. However, plan sponsors should consult with the third-party administrative firm servicing their plan. There are several important implications to eliminating safe harbor provisions that should be considered prior to doing so. For example, if you eliminate a safe harbor contribution it could inadvertently trigger top-heavy contributions that could be more costly than the safe harbor expense.

If you feel that elimination of your plan safe harbor provisions is warranted, please reach out to HBKS Wealth Advisors and we can help you think through this issue in conjunction with the administrative firm servicing your plan.

Reducing or eliminating safe harbor contributions
Final IRS Regulations issued November 15, 2013 and effective since January 1, 2015 now allow an employer to reduce or eliminate safe harbor matching contributions and safe harbor non-elective contributions mid-year provided one of the following requirements are met:

The employer is operating at an economic loss for the plan year as described in IRS section 412(c)(2)(A); or the safe harbor notice provided to employees prior to the beginning of the plan year is written with specific language disclosing the possibility of the safe harbor contributions being eliminated or reduced mid-year.

Factors to consider prior to eliminating safe harbor contributions from a 401(k) Plan

Top heavy implications

An employer suspending its safe harbor match or non-elective contribution will be required to satisfy its top-heavy minimum contribution requirements for the entire plan year. It is recommended that careful consideration be taken prior to eliminating safe harbor contributions, as it is possible for top heavy requirements to exceed safe harbor contribution requirements.

ADP and ACP test requirement
An employer suspending its safe harbor match or non-elective contribution will be required to satisfy the ADP and/or ACP tests for the entire plan year. It is recommended that careful consideration be taken prior to eliminating safe harbor contributions, as it is possible for highly compensated employees to receive refunds due to failed ADP and ACP tests.

What steps must the employer follow to reduce or eliminate the safe harbor 401(k) contribution (match or non-elective) from a retirement plan?

  • Adopt an amendment to reduce or eliminate the matching contribution or non-elective contribution, effective at least 30 days after the amendment’s adoption date or at least 30 days after eligible employees are provided the supplemental notice, whichever is later;
  • Give a supplemental notice to employees at least 30 days prior to the effective date of the amendment that explains the consequences of the reduction or suspension of the safe harbor contributions, and the procedures for employees to change their deferral elections;
  • Provide the employees a reasonable opportunity after receipt of the notice to change their deferral election;
  • Fund the match or non-elective contribution requirement with respect to safe harbor compensation paid through the effective date of the amendment and prorated for the 401(a)(17) compensation limit; and
  • Apply current year testing for the entire plan year for both the ADP and ACP tests.

Note: The safe harbor matching contributions and safe harbor non-elective contributions will qualify as qualified matching contributions and qualified non-elective contributions, respectively; therefore, the employer may use the contributions in the ADP or ACP test.

IMPORTANT DISCLOSURES
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

About the Author(s)

R. Dean Piccirillo, CFP®, CRPS®, AIFA®
Dean Piccirillo is a principal, senior financial advisor and client service team director advising HBKS® Wealth Advisors clients in the firm’s Fort Myers and Sarasota, Florida offices. Additionally, he works with a number of families out of the firm’s offices in his hometown of Erie, Pennsylvania. Dean also directs the HBKS® Wealth Advisors Retirement Plan Unit which provides investment consulting services for dozens of corporate, nonprofit and municipal retirement plans.

Rod Diaz, CRPS®, AIFA®
Rod Diaz serves as Manager of the Retirement Plan Services Unit for HBKS Wealth Advisors. Prior to that Rod served as Manager of Retirement Plan Services for McKinley Carter Wealth Services.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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