Some 401(k) plan sponsors will have to shut down their plans this year if the government does not lift a 3% minimum contribution requirement.
The American Society of Pension Professionals & Actuaries, Arlington, Va., has issued that warning in a letter asking the Internal Revenue Service to help ease the contribution rules for sponsors of 401(k) “safe harbor” plans.
At a time when the economy was strong, the IRS permitted sponsors to avoid some contribution discrimination tests by agreeing to contribute an amount equal to 3% of each plan participant’s salary to each participant’s account.
This year, the recession is forcing many employers to suspend or reduce 401(k) plan matching contributions.
Under existing regulations, employers that cannot afford to continue the 3% nonelective safe harbor contributions “have no other recourse than to terminate their plans,” ASPPA says.
The IRS should let employers suspend safe harbor contributions this year, and it also should come up with notification rules and other rules for implementing a contribution suspension, ASPPA says.
Employers should, for example, still make plan contributions at the 3% annualized rate for compensation earned up to the date the suspension takes effect, ASPPA says.
The IRS could prevent discrimination by requiring an employer that suspends the nonelective contributions during a plan year to satisfy an anti-discrimination test — the “actual deferred percentage” test – for the entire plan year.
“This would ensure that the suspension of nonelective contributions would not result in discriminatory deferrals for highly compensated employees,” ASPPA says.