Executive Summary
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Typically, a safe harbor 401(k) plan cannot be amended mid-year except in certain circumstances under the internal revenue code (“Code”) and IRS Notice 2016-16. If an impermissible amendment is made, the plan will not satisfy the requirements of the Code and lose its safe harbor status. Notice 2016-16 provides guidance on mid-year amendments to safe harbor plans, including conditions for reducing or suspending safe harbor contributions. One of the main conditions for mid-year amendments to safe harbor 401(k) plans is 30 days advance notice to all eligible employees of the amendments and permitting employees to change their elections during this time.
To help alleviate the negative business impact that employers are having due to COVID-19, the IRS released Notice 2020-52 to provide employers with more flexibility.
I. Mid-year Changes for Only HCEs
Notice 2020-52 clarifies that any amendment or change that reduces
or suspends contributions made to only HCEs are not “safe
harbor” contributions as “safe harbor”
contributions are meant to benefit non-HCEs. Prior to this
guidance, it was thought that reduction to safe harbor
contributions to only HCEs would cause a 401(k) plan to lose safe
harbor status. Thus, contributions to HCEs can be reduced or
suspended at any time. However, to satisfy the notice and election
provisions of the Code, the impacted HCEs must be given 30 days
advance notice of the change and an opportunity to change their
elections.
II. Mid-year Amendments Applicable to All Participants
Under the Code and IRS Notice 2016-16, changes to safe harbor plans
mid-year to reduce or suspend safe harbor matching and nonelective
contributions to non-HCEs can only occur if the employer
meets (“Required Conditions”):
- is operating at an economic loss for the plan year; or
- included in the 401(k) plans safe harbor notice a statement that “the employer may suspend or reduce the current year's safe harbor matching or nonelective contributions and the suspension or reduction will not apply earlier than 30 days after all eligible employees are provided notice of the suspension or reduction” (“Statement”).
The IRS is providing temporary relief to permit employers to amend their safe harbor 401(k) plans to reduce safe harbor matching and nonelective contributions between March 13, 2020 and August 31, 2020. Employers that amend their 401(k) plans by August 31, 2020 do not need to satisfy the Required Conditions.
Employers that amend their 401(k) plans to reduce nonelective safe harbor contributions do not need to give the required 30 days advance notice of the amendment to all eligible employees, provided the notice is sent to all eligible employees by August 31, 2020 and employees can thereafter change their elections.
Employers that amend their 401(k) plans to reduce matching safe harbor contributions must still give the required 30 days advance notice of the amendment and permit changes to employee's elections during this time.
If you have a safe harbor 401(k) plan and are considering reductions in matching or nonelective contributions, now maybe the best time to make an amendment to your 401(k) plan during the temporary relief period. Amending a 401(k) plan can take time, depending upon the third party service provider you are using for your 401(k) plan. Thus, a decision should be made soon to process the amendment during the temporary relief period.
Originally published by Masuda Funai, August 2020
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.