This excerpt by Cohen and Clark as printed in Employee Benefit News explains IRS’s new standard on softening of the allowance to suspend employer contributions to plans during difficult business conditions:
“The final regulations modify the “substantial business hardship” standard for suspending or reducing safe harbor nonelective contributions, replacing that standard with an “operating at an economic loss” standard. The economic loss standard is intended to be more objective and avoid the factual uncertainty of some of the “substantial business hardship” requirements. The final regulations also allow an employer to suspend or reduce safe harbor nonelective contributions for any reason if the employer provides participants with notice before the beginning of the plan year that discloses the possibility that contributions may be suspended or reduced during the plan year. This notice must explain that participants will receive a supplemental notice if the suspension or reduction does occur, and that the suspension or reduction will not apply until at least 30 days after the supplemental notice is provided. The following additional conditions, which remain unchanged from the conditions that applied to safe harbor matching contributions in the original final regulations, must also be met:
Employees are given a supplemental notice describing the suspension or reduction;
The suspension or reduction becomes effective no earlier than the later of (i) 30 days after the supplemental notice is provided, or (ii) the date the amendment is adopted;
Employees are given a reasonable opportunity and period of time before the suspension or reduction takes effect to adjust their deferral elections;
The plan is amended to provide that it will satisfy the ADP and/or the ACP test, using the current year testing method, for the full plan year; and
The plan satisfies the safe harbor contribution requirement through the amendment’s effective date.
In order to achieve uniformity between the rules that apply to a mid-year suspension or reduction of safe harbor matching contributions and a mid-year suspension or reduction of safe harbor nonelective contributions, the final regulations also modify the rules that apply to mid-year suspensions or reductions of safe harbor matching contributions. Safe harbor matching contributions can still be suspended or reduced for any reason, but effective January 1, 2015, the employer must provide participants with notice before the beginning of the plan year which discloses the possibility that contributions may be suspended or reduced mid-year. Suspensions or reductions as a result of operating at an economic loss are also permitted. The additional requirements described above will continue to apply to a suspension or reduction of matching contributions.”