The IRS has come up with some new rules to “ease the pain” of these dire economic conditions and has issued some proposed regulations allowing employers to reduce or suspend their 401(k) or 403(b) safe harbor nonelective contributions mid-year in the case of a “substantial business hardship described in section 412(c) [of the Internal Revenue Code].” The IRS notes in the preamble to the proposed regulations (in today’s Federal Register) that the new rules will “provide an employer an alternative to the option of terminating the employer’s safe harbor plan in such a situation” (i.e. better to ease the rules a bit, than have employers ditch the plans altogether in an attempt to get rid of the mandatory contribution). There is a 30-day advance notice requirement and a requirement that employees be allowed to change their salary deferral elections in order to take advantage of the new rules.
Please note the following regarding the proposed effective date of the new rules:
These regulations are proposed to be effective for amendments adopted after May 18, 2009. Taxpayers may rely on these proposed regulations for guidance pending the issuance of final regulations. If, and to the extent, the final regulations are more restrictive than the guidance in these proposed regulations, those provisions of the final regulations will be applied without retroactive effect.