In comments submitted today to the Department of Treasury and Internal Revenue Service, The ERISA Industry Committee (ERIC) welcomed the relief provided in proposed regulations allowing plan sponsors to suspend qualified non-elective contributions (QNECs) in safe harbor section 401(k) plans, but urged that the “substantial business hardship” requirement be dropped from the final regulation as unnecessary and burdensome.
The Treasury Department and IRS on May 18, 2009, proposed regulations that would allow employers to reduce or suspend safe harbor non-elective contributions to 401(k) and 403(b) plans due to substantial business hardship.
ERIC President Mark Ugoretz said that, “ERIC appreciates the efforts of Treasury and the Service to provide relief to section 401(k) plan sponsors who are suffering in the midst of the worst economic environment in many decades. By recognizing and responding to the financial downturn, Treasury and the Service increase the likelihood that employers will adopt and maintain employee benefit plans, one of the original overarching goals of ERISA [the Employee Retirement Income Security Act].”
Ugoretz stressed, however, that a plan sponsor should not be required to incur a substantial hardship in order to reduce or suspend QNECs and that the requirement is “unduly burdensome.” The proposed regulations define a “substantial business hardship” as “comparable to a substantial business hardship described in section 412(c)” of the Internal Revenue Code, relating to waivers of the annual funding requirements for pension plans.
ERIC argued that the analogy to a funding waiver is misplaced, because sponsors of defined benefit pension plans are required to comply with the funding requirements, while a 401(k) sponsor may elect whether or not to use 401(k) safe harbors to comply with the automatic deferral percentage (ADP) and actual contribution percentage (ACP) tests. “Indeed, if a plan sponsor elects not to use a safe harbor, the plan must still comply with the ADP and ACP tests,” the letter says.
In addition, Ugoretz says that, “while it is not clear the extent to which each factor would need to be satisfied, the proposed regulations would at least require taking into account not only whether an employer experiences financial difficulty, but also whether an entire industry suffers economically. These criteria are not necessary to ensure compliance with the nondiscrimination rules. If imposed by the final regulations, these requirements would make the intended relief available to few, if any, section 401(k) plans.”
Moreover, ERIC contends that the substantial business hardship requirement would impose a vague standard on which plan sponsors would be reluctant to rely. “Not only are the terms ‘substantial unemployment’ and ‘depressed’ unclear, the proposed regulations would require a ‘comparable’ hardship without explaining what ‘comparable’ means. Furthermore, it is not clear the extent to which any factor must be present to constitute substantial business hardship,” ERIC says.
ERIC concludes that “flexibility to respond to the current economic crisis — and relief from the QNEC requirements for safe harbor plans in particular — are important,” but that the “substantial business hardship requirement, however, is inappropriate, unduly burdensome, and vague. The goals of the nondiscrimination rules can be achieved without this requirement.”
