There is good news for Employers that sponsor 401(k) plans using a special employer contribution (“safe harbor contribution”) designed to avoid non-discrimination testing!
On January 29, 2016, the IRS released Notice 2016-16, “Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices.” This notice increases the instances in which a Safe Harbor (SH) plan may be amended during the Plan Year and provides clarification on what mid-year changes and amendments are prohibited.
Mid-year changes are defined as a change that is effective on any day other than the first day of the plan year, or a change that may be effective as of the first day of the plan year, but not adopted until a later date. Safe Harbor plan sponsors are now permitted to adopt amendments during the plan year, which were previously prohibited except in very limited instances.
In place of only allowing a small number of exceptions, the IRS now permits all mid-year amendments with a handful of limited exceptions, as long as the changes are partnered with the appropriate notification to eligible employees and a window is opened to allow the employees to modify their deferral elections once the notice has been distributed.
When any amendment changes the information provided in the initial Safe Harbor notice, an updated notice must be provided. The timing of this updated notice mirrors the distribution timing for any SH notice – must be distributed at least 30 days (but not more than 90 days) in advance of the effective date of the amendment. Additionally, participants must be permitted to modify their deferral elections for a 30-day window after receiving the updated notice.
Although the IRS expands the allowable instances for mid-year changes, there are still a number of changes that are prohibited mid-year. Specific prohibited items include:
- Changing between a traditional Safe Harbor design and a QACA (Qualified Automatic Contribution Arrangement);
- Increasing the number of years required to become vested for QACA Safe Harbor contributions;
- Any change reducing the number of employees currently eligible to receive the Safe Harbor contribution. (Note: it is permissible to amend the plan to make the eligibility requirements stricter, but only for employees who are not yet eligible for the plan.);
- A change to increase matching contributions, add discretionary contributions or change the definition of compensation used to determine matching contributions, unless (i) the amendment is adopted at least 3 months prior to the end of the plan year, (ii) is retroactive for the entire plan year, and (iii) the updated safe harbor notice and election window are provided.
This change in the IRS position is a very welcome one and removes a strict rule that complicated Safe Harbor 401(k) plans and possibly discouraged some employers from adopting safe harbor plan provisions.
To read the full notice, click here.