For many years, the IRS has taken the position that a plan sponsor may not make mid-year amendments to safe harbor 401(k) plans. This was based on regulations requiring that, subject to specific exceptions, the safe harbor provisions, once adopted, must remain in effect for an entire 12-month plan year.
Most practitioners had interpreted this regulation to prevent mid-year changes to the safe harbor contribution election itself and, perhaps, to those plan provisions described in the annual safe harbor notice, including eligibility requirements, entry dates and vesting. The IRS, on the other hand, had taken the position that the regulations prevent any mid-year change to the plan unless specific exception has been granted by regulation or other formal pronouncement, precluding any change to the plan once the plan year has commenced. The concern, of course, has been that a mid-year amendment could cause loss of safe harbor status, making the 401(k) deferral subject to nondiscrimination testing.
On January 29, 2016, the IRS issued Notice 2016-16, which vastly expands the types of changes that may be made to a safe harbor plan during the plan year and given retroactive effect. The Notice includes a short list of prohibited mid-year changes but, in general, permits any other modifications, as long as eligible employees are advised of the amendment and given a reasonable opportunity thereafter to modify their deferral elections.
If the amendment alters the information included in the initial safe harbor notice, an updated safe harbor notice must be provided at least 30 days, but not more than 90 days, in advance of the effective date of the amendment. If notice cannot be provided within that time frame, as would be the case when an amendment is to become effective retroactively, the notice must be provided within 30 days of the date on which the amendment is adopted.
By making it clear that employers retain the flexibility to make mid-year changes to their plans, significant uncertainty is eliminated. Employers that previously have been reluctant to utilize one of the safe harbors may wish to reconsider that decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
