How Plan Sponsors Can Suspend 401(k) Safe Harbor Contributions | Lord Abbett
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Retirement Perspectives

Plan sponsors need to follow a few rules before changing contributions to Safe Harbor retirement plans.

The financial havoc caused by the coronavirus is sparking an important question: Can a plan sponsor suspend or reduce 401(k) safe harbor contributions for the current plan year?

The answer is yes. An employer can reduce or suspend their Safe Harbor contribution—either match or non-elective—during a plan year under limited circumstances. The two exceptions are:

  1. If an employer is operating at an “economic loss,” the plan sponsor can reduce or suspend safe harbor contributions. Internal Revenue Code (IRC) Section 412(c)(2)(A) generally requires that the employer would likely need to show that its expenses exceed income for the year.
  2. Employer must have included in their safe harbor notice, which is required to be delivered annually to plan participants, a statement that the plan may be amended in the upcoming year to suspend or reduce safe harbor contributions and that the suspension or reduction will not apply until at least 30 days after all eligible employees receive an additional notice of the suspension or reduction. If this statement is included, the safe harbor contribution may be reduced or suspended for any reason.

Safe Harbor 401(k) and 403(b) retirement plans have grown in popularity, especially with small business owners. It’s easy to see why. Safe Harbor plans offer a vast array of benefits with minimal drawbacks. Safe Harbor 401(k) plans, unlike “traditional” 401(k) plans, receive an automatic pass on annual nondiscrimination testing (Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP) and top-heavy testing) assuming certain requirements are satisfied. However, the employer, in turn for a testing pass, is required to make a mandatory 100% immediate vested contribution (matching or non-elective) to each plan participant. Not satisfying all of the Safe Harbor rules and regulations can bring additional financial headaches. Therefore, it’s critical that plan sponsors work hand-in-hand with both their financial professional and third-party administrator (TPA) to ensure all rules are followed.

What else do plan sponsors need to know about reducing or suspending Safe Harbor contributions?

  • The plan document must be amended reflecting the reduction or suspension.
  • The plan becomes subject to nondiscrimination testing (ADP, ACP, and top-heavy) for the entire plan year.
  • A plan that reduces or suspends its Safe Harbor contributions becomes subject to top-heavy testing and therefore may be required to make a top-heavy contribution that could potentially be more expensive than the suspended/reduced safe harbor contributions.
  • 30 day employee notice is required regardless of reasons for the reduction or suspension of the Safe Harbor contribution.

Can an employer terminate a safe harbor 401(k) plan during the plan year?
An employer may terminate a Safe Harbor 401(k) plan mid-year regardless of whether safe harbor funding is made through a non-elective or matching contribution. In addition, under the mid-year termination rules, it’s possible to preserve safe harbor status in the year of termination under limited circumstances. First, retaining safe harbor status is dependent on the reason for the plan termination. If a plan is terminated due to a “substantial business hardship,” its safe harbor status is preserved, giving the employer a pass on all nondiscrimination testing. Second, the required safe harbor contribution (match or non-elective) must be made through the date of plan termination. In other words, retaining safe harbor status requires a plan sponsors to terminate the plan as a result of an economic hardship.

Factors taken into account to determine if an employer has suffered a substantial business hardship include whether:

  • The employer is operating at an economic loss;
  • There is substantial unemployment or underemployment in the trade or business and in the industry concerned; and
  • Sales and profits of the industry concerned are depressed or declining.

An employer that does not initiate a plan termination on account of a substantial business hardship must follow the following steps to properly terminate a safe harbor 401(k) plan:

  1. Employer must provide a 30-day notice to participants informing them of its intension to terminate the plan;
  2. Fund the safe harbor contribution through the termination date; and
  3. Run the ADP and ACP tests using current year testing method.

What is the rule in the SECURE Act for suspending or reducing Safe Harbor contributions?
Under the new SECURE Act rules, effective after December 31 2019, an employer who makes non-elective safe harbor contributions is no longer required to deliver an annual safe harbor notice to plan participants. The SECURE Act also changed the safe harbor rules that allow an employer to amend a plan during the plan year or after the end of a plan year to add safe harbor non-elective contributions without having to provide notice. 

It is not clear how these changes will affect an employer that suspends its safe harbor contributions during a plan year and wishes to amend its plan later in the same plan year to resume making safe harbor contributions. In our view, we will need to wait for the IRS to issue guidance. We recommend that plan sponsors speak with tax professional and/or legal counsel.

If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.


To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.


401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan; it must provide employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans. Safe harbor 401(k) plans that do not provide any additional contributions in a year are exempted from the top-heavy rules of section 416 of the Internal Revenue Code.

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