Don’t Believe Everything You Hear – You Can Terminate Your 401(K) Safe Harbor Match Formula Mid-Year (Usually)

I have recently had two separate employers tell me that they wanted to stop making safe harbor matching contributions to participants in their 401(k) retirement plans in the middle of a plan year. The employers had very different reasons for wanting to eliminate their safe harbor match mid-year, but they had identical stories about what their plans’ institutional record keepers told them when they asked the record keepers what procedures to follow to terminate the match. Both employers were told that terminating a safe harbor match mid-year was not permissible and that they could only terminate the match effective for the next plan year.

Under the tax code, a 401(k) plan that meets certain “safe harbor” conditions for a plan year is deemed to satisfy the actual deferral percentage (ADP) and the actual contribution percentage (ACP) discrimination tests and will not be considered top heavy for that plan year. One method for satisfying the safe harbor rules requires the employer to make minimum matching contributions to the accounts of all participants who make elective deferrals (and employee contributions) for the plan year and to provide a notice to eligible employees before the start of the plan year informing the employees, among other things, of the plan’s safe harbor match formula and intent to be a safe harbor plan for the plan year. One additional condition for safe harbor status is that in general, a plan’s safe harbor provisions must remain in effect for the entire plan year.

Despite the entire plan year requirement, and despite what the employers I talked to were told, it is permissible to terminate a 401(k) safe harbor formula mid-year, provided certain conditions are satisfied. These conditions are that:

  • The employer must be operating at an economic loss, or the plan’s notice of safe harbor status included a statement that the plan may be amended during the plan year to reduce or suspend the safe harbor matching contribution and that the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension;
  • All eligible employees are provided a supplemental notice that explains the consequences of the amendment that reduces or suspends future safe harbor contributions, the procedures for the employees to change their deferrals or contributions to the plan, and the effective date of the amendment;
  • The reduction or suspension is not effective earlier than the later of the date the amendment is adopted or 30 days after the supplemental notice is provided to eligible employees;
  • Eligible employees are given a reasonable opportunity after receipt of the supplemental notice and prior to the reduction or suspension to change their deferrals or contributions to the plan;
  • The plan is amended to provide that the ADP and ACP tests will be satisfied for the entire plan year using the current year testing method; and
  • The plan satisfied the safe harbor requirements through the effective date of the amendment.

For employers sponsoring 401(k) plans with safe harbor matching contributions, there are two immediate takeaways from my recent experience. The first is to check their plan’s annual safe harbor notices to ensure that they include language stating that their plans may be amended mid-year to reduce or suspend the safe harbor match with at least 30 days’ notice. The second is think carefully about the guidance their record keepers provide. If their answer does not sound logical or fair, or does not help them achieve their business objectives, they should consult with a qualified employee benefits attorney. General statements about what the law allows are a start, but in the employee benefits world, details matter.

If you have questions about this information, please contact Jordan Schreier in Dickinson Wright’s Ann Arbor, Michigan office at 734-623-1945 (

Tax Tip: Generation-Skipping Transfer Trusts

Generation-Skipping Transfer (GST) trusts have long been a popular estate tax planning tool used to defer transfer tax to a future generation. While the estate tax exemption is at a historical high, the GST tax exempt status of existing trusts is still important when planning for a family’s overall tax situation. Trusts established by a parent or grandparent can be qualified as GST exempt or GST non-exempt trusts, depending on whether the creator’s GST tax exemption was allocated to the trust. Any distribution from a GST non-exempt trust to a grandchild (or more remote descendant) will be subject to GST tax at a 40% rate, regardless of whether the distribution is made during the term of the trust or upon the termination of the trust. This GST tax can apply even if the beneficiary’s estate is not otherwise subject to estate tax.

There may be planning opportunities to minimize or avoid GST tax on a distribution to a grandchild from a GST non-exempt trust, either through a late allocation of GST exemption, application of the predeceased ancestor rule, exercise of a special power of appointment or addition of a general power of appointment. Timing is important, as some of these planning opportunities are only available while the trust creator or an older beneficiary is alive.

If you have a trust created by a parent or grandparent and need assistance in determining whether the trust is GST exempt or non-exempt, or if you have a GST non-exempt trust and want to explore what tax saving opportunities may be available, please contact Jeff Gehring at 859-899-8713 or one of the other estate planners in Lexington, Nashville, Phoenix, Detroit, Grand Rapids or Troy.

IRS Issues New Form For Reporting Non-Deductible Fines and Penalties

Internal Revenue Code Section 162, as amended by the 2017 Tax Cuts and Jobs Act (TCJA), provides that no deduction is allowed for any amount paid to, or at the direction of, a governmental entity in relation to the violation of any law. A corresponding obligation to report the receipt or imposition of such “fines or penalties” was imposed on governmental entities for amounts of $600 or more, however, the reporting obligation is postponed until the Internal Revenue Service issues proposed regulations regarding the above provision.

Existing Treasury regulations make clear that the rules regarding non-deductibility (and presumably information reporting) also apply to civil penalties imposed under federal, state or local law with respect to tax returns.

Although the IRS has not issued proposed regulations as required by TCJA, it recently issued a new Form 1098-F and related instructions to implement the reporting scheme beginning in 2019. Similar to other types of Forms 1098 and 1099, reports by governmental entities must be filed with the IRS and a copy provided to the payor.

For more information, please contact Tom Hammerschmidt in the Ann Arbor, Michigan office at 734-623-1602 or any member of Dickinson Wright’s tax department.

2018 Gift Tax Returns

If you made gifts in 2018 now is the time to begin thinking about filing a gift tax return. If you made gifts in 2018 in excess of the gift tax annual exclusion amount ($15,000 per donee in 2018, or $30,000 if a husband and wife elect to split gifts and a gift tax return is required to make this election), you must file a gift tax return and apply your lifetime gift tax exemption to report these gifts. For gifts made in 2018 each person has a gift tax exemption of $11,180,000, reduced by the value of any prior lifetime gifts. Any gifts made in excess of the lifetime gift tax exemption are taxable at a rate of 40%. A gift tax return to report gifts made in 2018 is due on April 15, 2019, and may be extended until October 15,2019.

If you made a gift to a trust that has the potential to distribute property to a grandchild or later descendant, it is important to file a gift tax return to have a clear record of the Generation-Skipping Transfer (GST) tax exemption allocated to the trust. If a person relies on automatic allocation of GST exemption instead of filing a gift tax return it can be confusing at a later date to determine if a trust is GST exempt, so filing a gift tax return to affirmatively allocate GST exemption is a better practice even if automatic allocation may apply.

For more information please contact Tara Halbert in the Lexington, Kentucky office at 859-899-8711.