May an employer amend its plan to reduce an enhanced safe harbor match to a basic safe harbor match after the plan year has started? Example: A calendar-year plan has been a safe harbor for two years. The employer would like to lower its enhanced match (dollar-for-dollar on the first 5% deferred) to the basic match (dollar-for-dollar on the first 3% and 50 cents on a dollar on the next 2%). May the plan be amended on February 27, 2009, for the 2009 plan year?
Rev. 02/05/09; E-mail Alert 2009-2

There is no guidance relating to reducing an enhanced safe harbor matching contribution to a basic safe harbor matching formula during the plan year. So the safest answer for the employer is that this cannot be done.  

MHCO Comment: We believe that in light of current economic circumstances, this is something that the IRS should allow; since participants are better off with the basic matching contribution then no contribution.

Of note is that there is guidance permitting the complete cessation of a safe harbor matching contribution during a plan year. To do this, the plan is to be amended to remove the safe harbor matching contribution provision and a notice provided to the employees to inform them of the change. Thirty days after the employee notice is provided, the safe harbor match may be stopped. The plan is to be tested for the entire year.

Note that the IRS has issued guidance (Announcement 2007-59) permitting two plan changes to be made during a plan year without causing the plan to fail the safe harbor requirements. Those two changes are the addition of designated Roth contributions and the addition of hardship provisions. The IRS asked for comments on other changes that may be made mid-year without invalidating the safe harbor, but to date the IRS has issued no further guidance listing additional permitted changes.   

On a related topic, we have received a number of calls already in 2009 about stopping a safe harbor 401(k) guaranteed nonelective for the 2009 plan year. Unfortunately, for calendar year safe harbor 401(k) plans, a guaranteed safe harbor nonelective contribution must be made for the entire plan year once the plan year has started. The employer should consider amending the plan effective for the next plan year to remove the safe harbor guaranteed nonelective. This should be done with at least 30 to 90 days before the beginning of the next plan year. The employer may opt for the flexible nonelective safe harbor contribution or for the safe harbor matching contribution or to have no safe harbor for the next year. As to the 2009 year, the only other option to avoid the guaranteed nonelective would be to terminate the plan. Since there are approximately ten-and-one-half months left of the plan year, this may be an important consideration to some employers who are having financially difficult times this year.  Once a 401(k) plan is terminated, the successor plan rules would require the employer to wait for 12 months from the last distribution from the 401(k) plan before a new 401(k) plan may be started (unless the <2% exception applies).  

MHCO Comment: Because of the current economic conditions, some practitioners are now expressing that the IRS should allow employers to stop the safe-harbor non-elective contributions in the same fashion as the match.  However, with the availability of flexible non-elective contributions, the IRS has not been convinced of the need. 

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