New guidance allows midyear changes to safe harbor retirement plan contributions

Many employers searching for cost savings in the midst of the COVID-19 pandemic naturally have begun scrutinizing their contributions to benefits, such as retirement plans. The rules for making changes to retirement plan terms—and permit reductions in employer contributions—are complex, but new guidance temporarily permits you to reduce or suspend safe harbor contributions midyear.

Safe harbor retirement plans

Under the rules governing qualified retirement plans (such as a 401(k) or 403(b) plans), contributions and benefits must not discriminate in favor of highly compensated employees (HCEs). Each year a plan must go through various tests for all participants, including the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test, which measure how evenly all employees are participating. In particular, the tests assess whether participation in the plan or benefits discriminates in the HCEs' favor.

If a plan opts to be a safe harbor plan, however, it’s exempted from annual ACP and ADP testing. Safe harbor plans make either an annual matching contribution or nonelective employer contribution. The set amount is 3% of compensation, and it must be made on behalf of each eligible employee who isn’t an HCE.