Back to Blog

Reflecting the changes occurring in our current economic times

DECEMBER 16, 2013

By: Jeffrey S. Adler

Thursday, 12 December 2013                                                                 WRM# 13-49

The WRMarketplace is created exclusively for AALU Members by the AALU staff and Greenberg Traurig, one of the nation’s leading tax and wealth management law firms. The WRMarketplace provides deep insight into trends and events impacting the use of life insurance products, including key take-aways, for AALU members, clients and advisors.

This report has been prepared exclusively for Jeffrey Adler, Executive Capital Resources

TOPIC: New Regulations Change Requirements for Discontinuing 401(k) Plan Safe Harbors Contributions During a Plan Year.

MARKET TREND: Reflecting the changes occurring in our current economic times, the IRS has relaxed some rules relating to the mid-year reduction or suspension of employer contributions to certain “safe harbor” 401(k) plans for those employers having economic difficulties.

SYNOPSIS: To avoid the nondiscrimination testing applicable to 401(k) plans and possible reductions of the amounts that a highly compensated employee (“HCE”) could defer for a plan year, employers may structure 401(k) plans as “safe harbor plans.” With safe harbor plans, HCEs can defer as much as they like, subject to the annual cap on maximum deferrals. Safe harbor plans, however, must meet certain employer contribution obligations, which generally apply for the entire year. In some circumstances, these safe harbor contributions could be reduced or suspended in the middle of a plan year, but it was frequently difficult for a plan that satisfied the safe harbor with employer nonelective contributions to meet the standard for a mid-year reduction or suspension. Under new IRS regulations, these hurdles are relaxed for nonelective contribution plans but are raised somewhat for plans that satisfy the safe harbor using matching contributions.

TAKE AWAYS: Advisors to employers maintaining safe harbor 401(k) plans should counsel their clients to review their annual safe harbor notices and revise them accordingly to ensure that the employer will retain the maximum flexibility to suspend or reduce safe harbor contributions during the course of a plan year.

MAJOR REFERENCES:Treas. Reg. §1.401(k)-3


Scroll to read the full report.


Under recently issued final regulations, the IRS has significantly changed the rules relating to the mid-year reduction or suspension of employer contributions to certain “safe harbor” 401(k) plans.


To maintain its tax-qualified status, a 401(k) plan allowing elective deferrals – either on a pre-tax basis or a “Roth” basis – must not allow deferrals made for any year to discriminate in favor of HCEs (i.e., for 2014, participants who earned compensation from the employer in 2013 in excess of $115,000). Generally, to satisfy this nondiscrimination requirement, the average percentage of compensation deferred for each plan year by HCEs can only exceed the average percentage deferred by non-highly compensated employees (“NHCEs”) by a limited amount. Otherwise, the plan sponsor must either refund deferrals to HCEs or make an additional contribution to the accounts of NHCEs, in each case in an amount that would result in satisfaction of the test.

Given the costs and burden of nondiscrimination testing, many 401(k) plans are established as “safe harbor plans,” which allows them to forego this annual testing. To qualify for the “safe harbor” protections, the 401(k) plan must satisfy several requirements,[1] including certain employer contribution requirements with regard to NHCE participants. Plans can satisfy the safe harbor contributions either by providing a certain level of matching contributions (a “matching contribution plan”) or nonelective contributions (a “nonelective contribution plan”) to each NHCE who is eligible to participate in the plan. If the plan satisfies all safe harbor requirements, HCE participants can annually defer amounts up to the annual cap on maximum deferrals (i.e., $17,500 for 2014, with an additional $5,500 allowed for participants age 60 and older), regardless of the amount of non-HCE deferrals.


While a plan generally must qualify as a safe harbor plan for an entire plan year, certain regulatory exceptions allow a plan sponsor to suspend or reduce safe harbor contributions during the year (“mid-year contribution changes”) if it meets specified requirements. As shown below, effective as of November 15, 2013, recently issued final regulations have significantly changed these requirements, making mid-year contribution changes somewhat easier for nonelective contribution plans, but potentially more challenging for matching contribution plans.

Impact for Nonelective Contribution Plans


Proposed Regulations. Under the proposed regulations, nonelective contributions could be discontinued mid-year ONLY if the employer incurred a “substantial business hardship,” as determined by taking into account certain factors – specifically, whether: (1) the employer was operating at an economic loss, (2) there was substantial unemployment or underemployment in the trade or business and in the industry concerned, (3) the sales and profits of the industry concerned were depressed or declining, and (4) it was reasonable to expect that the plan would be continued only if the mid-year contribution change was granted. In addition, the plan had to meet certain procedural requirements, including:

* Amending the plan document to reduce or suspend the safe harbor contribution and to provide that the plan will be subject to the average deferral percentage test for the entire plan year;
* Providing eligible employees with a supplemental notice that explains the consequences of the amendment, the procedures for changing employee contribution elections, and the effective date of the amendment;
* Delaying the reduction or suspension of safe harbor nonelective contributions until at least the later of 30 days after employees are provided with the supplemental notice and the date the amendment is adopted; and
* Providing eligible employees a reasonable opportunity before the reduction or suspension of nonelective contributions to change their deferral elections.

Final Regulations. Under the new final regulations, nonelective contribution plans can implement mid-year contribution changes if either of the following requirements is met:

1. The employer shows that it is operating at an economic loss for the plan year (making evidence of the financial health of the employer’s industry and the employer’s ability to continue to maintain the plan, as required under the “substantial business hardship” test, no longer relevant) (the “economic loss requirement”); or

2. In addition to compliance with other notice and procedural requirements, the plan’s safe harbor notice distributed before the beginning of the plan year specifically states that: (a) the plan may be amended during the plan year to reduce or suspend safe harbor nonelective contributions and (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are notified of the reduction or suspension (the requirements for this second notice are the same as those under the proposed regulations for a reduction or suspension due to a substantial business hardship) (“annual notice requirement”).

Impact for Matching Contributions Plans


Prior Final Regulations. Under the prior version of the final regulations applicable to safe harbor plans, a matching contribution plan could make mid-year contribution changes by satisfying the plan amendment and notice rules described in the proposed regulations for the reduction of nonelective contributions. There was no need to demonstrate a “substantial business hardship.”

Final Regulations. Effective for plan years beginning on or after January 1, 2015, matching contribution plans must comply with the same requirements as nonelective contribution plans in order to make mid-year contribution changes. Thus, matching contribution plan now face somewhat higher hurdles to making mid-year contribution changes.



* Plans on a calendar year generally needed to distribute their annual safe harbor notices by December 2, 2013 and thus had limited time to take advantage of the new rules before 2014. Nonelective contribution plans on non-calendar years, however, should consider promptly revising their annual safe harbor notices to include provisions that will enable them to make mid-year contribution changes during their 2014 plan year.

* Although the new final regulations do not change the rules for matching contribution plans during the 2014 plan year, plan sponsors should remember to modify their annual safe harbor notices for the 2015 plan year so they can take advantage of the annual notice requirement.

* Regardless, both nonelective contribution plans and matching contribution plans maintained by employers operating at a financial loss for the 2014 plan year can still take advantage of the economic loss requirement to make mid-year contribution changes.


In order to comply with requirements imposed by the IRS which may apply to the Washington Report as distributed or as re-circulated by our members, please be advised of the following:


In the event that this Washington Report is also considered to be a “marketed opinion” within the meaning of the IRS guidance, then, as required by the IRS, please be further advised of the following:



The AALU WRNewswire and WRMarketplace are published by the Association for Advanced Life Underwriting® as part of the Essential Wisdom Series, the trusted source of actionable technical and marketplace knowledge for AALU members-the nation’s most advanced life insurance professionals.

WRM #13-49 was written by Greenberg Traurig, LLP
Jonathan M. Forster
Martin Kalb
Richard A. Sirus
Steven B. Lapidus
Rebecca Manicone

Counsel Emeritus
Gerald H. Sherman 1932-2012
Stuart Lewis 1945-2012



While a full discussion of all safe harbor plan requirements in beyond the scope of this WRMarketplace, the requirements generally include the following:

Employer Contribution.  A safe harbor plan must provide that the employer will contribute at least a certain amount on behalf of each non-HCE eligible to participate in the plan.   If the plan seeks to satisfy the safe harbor by using a matching contribution, the contribution generally must at least equal 100% of the employee’s elective contributions that do not exceed 1% of his or her compensation and 50% of the employee’s elective contributions that exceed 3%, but do not exceed 5%, of compensation.  Certain variations on this formula are permitted, and a slightly lower percentage is required for a plan that has an automatic enrollment feature.  If the plan seeks to satisfy the safe harbor through a nonelective contribution, a contribution equal to 3% of compensation must be made each plan year to the account of each NHCE eligible to participate in the plan, even if the NHCE does not elect to defer amounts under the plan.

Vesting.  The contribution made to satisfy the safe harbor, whether matching or nonelective, must be immediately 100% vested.

Restrictions on Distributions.  The employer contributions made to satisfy the safe harbor must be subject to the same restrictions on distributions as apply to employee deferrals (e.g., separation from service, death, disability, attainment of age 59½).

Plan Year Requirement.  Generally, a plan must be a safe harbor plan for a full plan year.

Notice. Within a reasonable time (generally 30 to 90 days) before the start of a plan year for which a plan is intended to be a safe harbor plan, the plan must provide to each eligible employee written notice of his or her rights and obligations under the plan.  Applicable regulations set forth the minimum content requirements for these notices.

Back to Blog