The Internal Revenue Service has proposed new regulations that permit employers experiencing business difficulties to suspend or reduce required contributions to certain 401(k) plans.

The proposal would allow employers to suspend or reduce nonelective contributions to a "safe harbor" 401(k) plan during a plan year without losing the plan's qualified status. A safe harbor 401(k) plan requires certain levels of fully vested employer contributions to be made to the plan on behalf of the employees but allows employers to bypass rigorous and burdensome nondiscrimination testing procedures applicable to a traditional 401(k) plan.

Under the proposed regulations, an employer will be able to amend its safe harbor plan to allow for the suspension or reduction of its nonelective contributions if it can demonstrate a "substantial business hardship." The employer typically can prove a hardship if the business has operating losses and unemployment or underemployment in an industry plagued by unemployment and depressed or declining market conditions.

To qualify, an employer will have to comply with several procedures, such as giving proper notice to the employees and providing them with an opportunity to adjust their own contributions. Certain rules concerning highly compensated employees also apply.

The proposed regulations are aimed at giving an employer an alternative to terminating a plan. The proposed regulations are effective for amendments made after May 18. If the final regulations are more stringent, the IRS will not apply them retroactively, which is an incentive for them to act now.

-- Thomas G. Eddy, BPU Investment Management Inc., teddy@bpuinvestments.com