Final regulations - Reduce, suspend safe harbor nonelective contributions under section 401(k) or 403(b) when substantial business hardship 

November 14: The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9641) concerning certain cash or deferred arrangements and matching contributions under section 401(k) plans and section 403(b) plans.

The final regulations [PDF 212 KB] permit employers to make mid-year reductions or suspensions of safe harbor nonelective contributions in instances of “substantial business hardship” for amendments adopted after May 18, 2009 (i.e., the date when the proposed regulations appeared in the Federal Register).

Changes in final regulations

Today’s final regulations generally adopt provisions of regulations proposed in 2009 (effectively providing employers an alternative to terminating a plan) with certain modifications.


As noted in today’s preamble, the final regulations make two changes in response to concerns about demonstrating compliance with the requirement that the employer incur a substantial business hardship (comparable to a substantial business hardship described in section 412(c)).


  • First, the requirement has been modified by replacing the standard in the proposed regulations that the employer have a substantial business hardship with a standard that the employer be operating at an economic loss (described in section 412(c)(2)(A)). This new standard eliminates the requirement to determine the health of the industry or whether the reduction or suspension of safe harbor nonelective contributions is needed so that the plan will continue.


  • Second, the final regulations permit an employer to reduce or suspend safe harbor nonelective contributions without regard to the financial condition of the employer if notice is provided to participants before the beginning of the plan year, which discloses the possibility that the contributions might be reduced or suspended mid-year. This rule also provides that a supplement notice must be provided when reduction or suspension does occur and that the reduction or suspension will not apply until at least 30 days after the supplemental notice is provided.

The final regulations do not alter the existing ability of a safe harbor plan to use a contingent notice before the beginning of the plan year when the contingent notice indicates that :(1) the plan may be amended during the plan year to include safe harbor nonelective contributions; and (2) if the plan is amended, a follow-up notice will be provided.


Concerning uniformity between the rules that apply to a mid-year reduction or suspension of safe harbor matching contributions and the rules that apply to a mid-year reduction or suspension of safe harbor nonelective contributions, the final regulations modify the rules that apply to mid-year amendments reducing or suspending safe harbor matching contributions—i.e., the requirements that apply to a mid-year reduction or suspension of safe harbor nonelective contributions are not stricter than those that apply to a mid-year reduction or suspension of safe harbor matching contributions. This is a new limitation on the ability of an employer to amend its plan to reduce or suspend safe harbor matching contributions, the change is first effective for plan years beginning on or after January 1, 2015.


The final regulations also provide for additional guidance to add situations in which a plan that includes provisions satisfying the requirements of Reg. section 1.401(k)-3 will not fail to satisfy the requirements of section 401(k) for a plan year even if the plan is amended during the plan year to implement a mid-year change to those provisions. According to the preamble, this provides greater flexibility to the IRS to develop rules to address special circumstances under which a mid-year change to a section 401(k) safe harbor plan is appropriate (e.g., an amendment to the plan in connection with a mid-year corporate transaction).


Concerning a rule limiting the reduction or suspension of safe harbor nonelective or matching contributions, the final regulations clarify the intention that the reduction or suspension cannot be effective earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the supplemental notice. Thus, the minimum 30-day waiting period applies solely with respect to the date the supplemental notice is provided and not the date the amendment is adopted.


Read an initial description of the proposed regulations: TaxNewsFlash-United States (May 15, 2009) [PDF 64 KB]




©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.


The KPMG logo and name are trademarks of KPMG International.


KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.


The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Direct comments, including requests for subscriptions, to us-kpmgwnt@kpmg.com.
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.

Share this

Share this