What will happen with salary deferrals of the highly compensated employees if the plan decides to suspend its safe harbor feature mid-year?
A mid-year suspension of safe harbor contribution will bring back the non-discrimination testing requirements for salary deferrals. As a result, if the average deferral percentage of the non-highly compensated employees (NHCE) is not sufficient to support the level of deferrals made by the highly-compensated employees (HCE), the non-discrimination test will fail. To correct the failure, some and sometimes all deferrals made by the HCEs will need to be refunded back to them or a corrective contribution to NHCEs will need to be made. A plan may opt to combine the two approaches to reach a desired outcome.
Cetera Retirement Plan Specialists is a third-party administrator and may not offer tax, legal or investment advice. Plan sponsors should consult their own tax, legal or investment professionals.