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IRS Aids Storm-Tossed Plans

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The Internal Revenue Service is trying to throw a life line to some 401(k) plan sponsors that are struggling to stay afloat.

The IRS has drafted regulations that could offer relief to sponsors that are coping with a “substantial business hardship” by suspending or reducing “safe harbor” nonelective plan contributions.

A plan that suspended or suspended safe harbor contributions would be subject to the 401(k) plan “top-heavy” rules, but a sponsor could change the contribution rate without having to shut down the plan, IRS officials write in the preamble to the proposed regulations, which appear today in the Federal Register.

An employer would have to notify participants of the change at least 30 days ahead of time, and give the employees a “reasonable opportunity . . . prior to the reduction or suspension of the safe harbor nonelective contributions to change their cash or deferred elections and, if applicable, their employee contribution elections,” officials write.

The notice requirement means that employers could not change the match at the beginning of the plan year, officials note.

The proposed regulations are effective for plan amendments adopted after Monday, and plans can rely on them while waiting for the final regulations to come out, officials say.

If the final regulations turn out to be more restrictive than the proposed regulations, the more restrictive provisions will apply only to amendments made after the final regulations appear, officials say.

Public comments on the proposed regulations are due Aug. 19, and a public hearing has been scheduled for Sept. 23.

A copy of the proposed regulations is available here.


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