In the wake of the financial crisis and the resulting recession, many companies have stopped contributions to their 401k plans, including their Safe Harbor 401k contribution.
Although a Watson Wyatt survey shows that 35% of firms who cut their match intend to reverse that decision in the next six months, many small business owners have not reinstated their match.
The IRS allows companies who are not doing well, and who maintain a safe harbor 401k, to stop making the safe harbor 401k contributions without losing the tax-qualified status of the 401k.
Under the existing rules, a Safe Harbor 401k that uses matching contributions can stop the match at any time during the plan year. However, the existing rules did not permit a company maintaining a 3% Safe Harbor 401k Contribution, to reduce or suspend the contribution during the year. The new rules will allow those companies that are suffering from the economy to stop the 3% safe harbor 401k contribution.
However the IRS has said that the 401k plan will not be exempt from the top-heavy rules or the non-discrimination rules. Thus the government is allowing companies to suspend matching contributions, yet they are forcing them to make contributions if they fail the non-discrimination testing.
The problem is that the contributions to satisfy the non-discrimination testing is normally larger than the safe harbor 401k match. 401ks need to be bailed out by the Government. They need to suspend the Top Heavy Rules so that companies with a substantial business hardship can recover.
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