New IRS Guidance on Safe Harbor 401(k) Contributions | Lord Abbett
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The agency provides much needed temporary relief for employers that are experiencing financial challenges and need to reduce or suspend 401(k) Safe Harbor contributions.

Read time: 3 minutes

On June 29, the IRS published Notice 2020-52 to help plan sponsors of 401(k) Safe Harbor plans cope with the financial stress of the COVID-19 pandemic. The Notice provides relief while relaxing some of the rules for employers who may choose to reduce or suspend Safe Harbor contributions mid-year to their 401(k) or 403(b) plan.

As we explained in our previous article, generally, employee salary deferrals and any employer contributions (match, profit sharing) provided under a 401(k) plan must not favor Highly Compensated Employees (HCEs). In other words, plan contributions are required to be non-discriminatory. Therefore, many employers offer their employees 401(k) Safe Harbor contributions as a way to automatically satisfy annual government required non-discrimination tests. Employer-funded Safe Harbor contributions can be made as matching or non-elective contributions. However, one critical requirement for satisfying Safe Harbor status (and thus not be subject to non-discrimination testing) is that employer contributions are generally required to remain in effect for the entire plan year.  The plan year requirement essentially says an employer may not modify (i.e. reduce or suspend) their pledged Safe Harbor contribution during the plan year.  If a plan sponsor modifies their Safe Harbor contribution, it could cause the 401(k) plan to be disqualified.

Notably, existing IRS regulations provide some albeit limited relief, allowing plan sponsors to suspend or reduce their Safe Harbor 401(k) contribution as long as several specific conditions are met. To be eligible for mid-year Safe Harbor contribution changes (reduced or suspend contributions), an employer must either:

  1. Be operating at an “economic loss.” 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.

If an employer’s Safe Harbor notice did not contain the required disclosure and if the plan sponsor was not sure whether the company was “operating at an economic loss,” the employer is still required to make Safe Harbor contributions for the rest of the plan year. 

IRS Notice 2020-52 permits employers to suspend or reduce safe harbor contributions (matching or non-elective) after March 13, 2020 for the balance of the year, regardless of whether the employer is operating an economic loss or its annual Safe Harbor notice did not include a statement that the employer has the right to reduce or suspend the Safe Harbor contribution during the current plan year. Therefore, employers sponsoring a Safe Harbor 401(k) plan have new options available to suspend or reduce Safe Harbor contributions for 2020.

Sponsors of Safe Harbor 401(k) or 403(b) plans that determined that under the existing rules (discussed earlier) did not qualify for a reduction or suspension of Safe Harbor contributions for the rest of 2020 now, per Notice 2020-52, have a roadmap to modify contributions by adhering to the following options:

  • Amend their plan document so Highly Compensated Employees (HCEs) will cease receiving Safe Harbor contributions, whereas Non-HCEs will continue to receive contributions. If an employer suspends Safe Harbor matching or non-elective contributions for HCEs only and continues contributing Safe Harbor contributions for Non-HCEs, its 401(k) plan will retain its Safe Harbor status and thus will not need to satisfy non-discrimination testing.

Ceasing Safe Harbor contributions mid-year for HCEs is not just temporary (i.e. remainder of the 2020 plan year). Instead, the change applies to all plan years. To stop Safe Harbor contributions for HCEs only, the amendment may be adopted at any time.

  • Amend their plan to suspend contributions for both HCEs and non-HCEs. Under the Notice 2020-52, if such an amendment is completed between March 13, 2020, and August 31, 2020, the plan does not have to satisfy the requirement that the employer either is operating at an economic loss or had included language in the plan’s Safe Harbor notice allowing modification of Safe Harbor contributions. Notably, the plan will no longer operate as a Safe Harbor Plan and therefore will be subject non-discrimination. In the case of an amendment to stop Safe Harbor contributions for all employees (non-HCEs as well as HCEs), this temporary relief applies to amendments adopted between March 13, 2020 and August 31, 2020. In addition, if an amendment that reduces or suspends Safe Harbor non-elective contributions is adopted between March 13, 2020 and August 31, 2020, the plan is not required to provide a supplemental notice to eligible employees at least 30 days before the reduction or suspension is effective, as long as certain requirements are met.

Many employers have implemented or are considering changes to their 401(k) plan matching and non-elective contributions in light of the economic situation related to the COVID-19 pandemic. Plan sponsors of Safe Harbor 401(k) and 403(b) plans now have a clear road map from IRS on how to reduce or suspend contributions to their plan for the 2020 plan year.

We recommend that plan sponsors consult with their Third Party Administrators (TPA), counsel, and financial professionals to ensure all rules and regulations are satisfied and the retirement plan remains compliant.


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.

403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.

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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