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SAFE HARBOR OPERATIONS FAQ

Can a plan cease/stop its safe harbor NEC mid-year?

Historically (pre 2009), plans with a safe harbor non-elective contribution can not back out of their 3% committment mid-year unless the company was ceasing to exist (as the IRS considers the safe harbor non-elective contribution as a required contribution at year end). Starting in 2009, the safe harbor non elective can be stopped with 30 days notice if the following hardship criteria are met:

  • The employer is operating at an economic loss
  • There is substantial unemployment or underemployment in the trade or business and in the industry concerned
  • The sales and profits of the industry concerned are depressed or declining
  • It is reasonable to expect that the plan will be continue only if the waiver is granted

The plan is required to provide 30 day notice and make the 3% non elective contribution through the stop date. The plan will be subject to the ADP and top heavy tests.

If your plan is top heavy, it does not make sense to stop the safe harbor contribution, as you will be required to make the 3% top heavy contribution at the end if any key employees benefit from the plan.

 

Can a plan cease/stop its safe harbor match mid-year?

Yes. The plan is required to provide 30 day notice and make the safe harbor company match through the stop date. The plan will be subject to the ADP and top heavy tests.

 

Can I terminate the plan in conjunction with stopping the safe harbor committment thus avoiding compliance test issues?

The answer is most likely no unless the company is ceasing to exist.

The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.

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