What Happens to a Safe Harbor Match Account When Frozen?

A safe harbor match account is an employer-sponsored retirement plan that ensures employees receive matching contributions with fewer restrictions. However, employers may freeze these accounts due to financial difficulties or business changes, temporarily halting certain plan activities.

When this happens, employees may face limitations on contributions and access to funds, along with potential effects on vesting. Understanding these impacts can help employees make informed financial decisions.

Employer Contributions During Freeze

When a safe harbor match account is frozen, employer contributions stop. Employees can still contribute their own funds but will not receive matching contributions. IRS regulations require employers to provide at least 30 days’ notice before halting contributions, giving employees time to adjust their financial plans.

The impact varies by plan type. In a non-elective contribution model, where employers contribute a fixed percentage of an employee’s salary regardless of participation, those contributions cease entirely. In a matching contribution model, employees who continue deferring part of their paycheck will no longer receive the employer’s match, slowing retirement savings growth.

Employers must meet IRS conditions to justify a freeze. A company must either be operating at an economic loss or have included a provision in the plan’s annual notice reserving the right to suspend contributions. If these conditions are not met, the employer risks compliance violations, which could lead to penalties or required corrective contributions. Once a freeze is enacted, the plan must undergo top-heavy testing to ensure highly compensated employees are not receiving a disproportionate share of benefits. If the plan fails, the employer may need to contribute additional funds for lower-paid employees to maintain compliance.

Locked or Limited Access to Funds

A freeze may also restrict employees’ ability to access their retirement savings beyond standard IRS rules. While normal 401(k) withdrawal regulations remain in place, a freeze can complicate loans and hardship distributions. Many plans allow participants to borrow against their balance, but during a freeze, employers may suspend new loans or prevent modifications to existing ones. This can create financial strain for employees relying on these funds for emergencies.

Hardship withdrawals, which the IRS permits for specific financial needs like medical expenses or foreclosure prevention, may also be affected. Employers that previously allowed them may suspend this option, leaving employees with fewer financial alternatives.

A freeze can also delay processing times for distributions. Employees who leave the company during the freeze may experience longer wait times before rolling over their funds into another retirement account. Employers facing financial difficulties may slow administrative processes, delaying fund disbursement.

Effects on Vesting Schedules

The impact of a freeze on vesting schedules depends on the plan’s structure. Safe harbor contributions are typically subject to immediate vesting, meaning employees own the employer’s contributions as soon as they are made. However, discretionary employer contributions that follow a graded or cliff vesting schedule may be affected.

In a graded vesting plan, where ownership of employer contributions increases over time, a freeze does not erase prior progress. However, if contributions stop, employees will not accumulate additional vested amounts, delaying full vesting.

In a cliff vesting plan, where employees receive 0% ownership until reaching a specific service period, a freeze can prolong the waiting period. If an employee was close to meeting the requirement when the freeze occurred, they may have to stay with the company longer to receive full ownership of employer contributions once they resume. Leaving before vesting resumes would mean forfeiting unvested funds.

Distribution and Rollover Rules

Employees considering a distribution or rollover during a freeze must follow IRS rules based on their employment status and the plan’s provisions. Active employees generally cannot take distributions unless they qualify for an exception, such as reaching age 59½. However, terminated employees can typically roll over their balance into another qualified retirement account, such as an IRA or a new employer’s 401(k), without triggering immediate tax liabilities.

If a terminated employee opts for a direct distribution instead of a rollover, the IRS requires a mandatory 20% federal tax withholding. Additionally, withdrawals before age 59½ may incur a 10% early withdrawal penalty unless an exception applies under Internal Revenue Code 72(t).

A freeze can also affect required minimum distributions (RMDs) for older participants. Under IRS rules, individuals must begin taking RMDs by April 1 of the year after they reach age 73, unless they are still working and the plan allows them to defer. If a freeze complicates the timing or calculation of these distributions, employees should consult a tax professional to ensure compliance and avoid penalties.