With many employers continuing to feel the long-term effects of the down economy, there is actually a little good news to share.

Employers who are struggling to fund their 401(k) safe harbor non-elective contribution programs are now being given a reprieve in navigating these tough times.

“Up until this point, if an employer has been unable to fund this type of program, the only alternative was to terminate it,” says John Stiglich vice president of Employment Benefit Services for Clifton Gunderson Financial Services.

Many companies have established safe harbor 401(k) plans for their employees. As a general rule, all 401(k) plans must satisfy certain non-discrimination requirements, known as the ADP test. The ADP test puts limitations on the amounts that higher-earning individuals can contribute — typically executives and business owners — because their contributions are generally limited to two percent over the average percentage of compensation contributed by non-highly compensated employees.

Creating a safe-harbor 401(k) plan gives companies the ability to avoid the ADP test requirements by doing one of two things, either providing a tiered employer matching contribution or a flat three-percent profit sharing contribution to all employees equally. The non-elective contribution to the employee’s account is also 100-percent vested at the time the contribution is made. In return, highly compensated individuals are able to contribute the maximum amount allowed.

“It’s a give and take,” says Stiglich. “I would say that 90 to 95 percent of the clients I work with have implemented safe-harbor plans.”

The problem for some companies right now is the ability to make their mandatory contributions to their safe-harbor 401(k) accounts.

“If you happen to be in a company that is operating at a loss, for example, suspending safe-harbor contributions is often a last-resort option,” he says. “But if you are in a situation where every last dollar counts, it can happen.”

The U.S. Treasury has proposed regulations on relief for employers, with the comment period effective as of May 18, 2009.
The biggest condition that an employer must prove to suspend safe-harbor contributions is the ability to prove “substantial business hardship.”

So what exactly does that mean? Factors that will be considered in determining whether an employer is experiencing a temporary, yet substantial business hardship include but are not limited to: Whether or not the employer is operating at an economic loss, there is substantial unemployment or underemployment in the trade or business, the sales or profits in the industry are depressed or declining and it is reasonable to expect that the plan will continue and not be terminated only if the employer is permitted to reduce or suspend safe harbor, non-elective contributions, according to information provided by Clifton Gunderson.

“In this situation, it is very beneficial to have documentation such as minutes or notes pertaining to the internal decision to suspend the contributions,” says Stiglich. “Documentation that presents the company’s current financial situation to date and any other related materials that show how the company is doing financially can also be helpful.”

Should your company decide to suspend contributions, all employees must be given a 30-day notice of the plan change along with a reasonable opportunity to change their deferral elections along with adequate information about the change.

“Taking the suspension is an ‘on-or-off’ proposition,” adds Stiglich. “Either the company suspends the contribution or it doesn’t.”
That suspension is not meant to be a permanent one, either. The regulation is designed to provide temporary relief to employers.

“In looking to next year, companies will need to amend their plan document again to include the safe harbor option,” he adds.
Just like in the suspension process, employers will need to give their employees adequate notice along with the opportunity to change their deferral elections.

By Laurie Arendt

Laurie Arendt is editor of CRW. She can be reached at crweditor@crwmag.com