Safe harbor 401(k) plans are generally easier for plan sponsors to administer and until recently, a major drawback was the lack of flexibility to make mid-year plan changes. Plans couldn’t be amended to increase nonelective contributions, change trustees, change investment options or comply with changes in applicable law. The restrictions on mid-year changes put some plan sponsors in a difficult situation.
Thankfully, that’s no longer the case as a result of recently issued IRS Notice 2016-16. The notice permits most mid-year changes, provided certain requirements are met and that the mid-year change is not otherwise expressly prohibited.
Key Requirements to Safe Harbor 401(k) Plans
In general, safe harbor 401(k) plans are deemed to satisfy nondiscrimination requirements without the need for expensive discrimination testing. In exchange, a plan sponsor must make minimum contributions to the plan, deliver “safe harbor notices” to participants, and prior to Notice 2016-16 make sure that plan provisions remained intact for the plans entire year (subject to limited exceptions). For this reason, most mid-year changes were impermissible.
With the release of Notice 2016-16, mid-year changes that aren’t expressly prohibited are permissible. A “mid-year change” is one that is (1) first effective during a plan year, but not effective at the beginning of the plan year, or (2) effective retroactive to the beginning of the plan year, but adopted later in the plan year.
If a mid-year change alters the content of the plan’s required safe harbor notice, the plan sponsor must:
- Provide participants with an updated safe harbor notice describing the change and its effective date 30 to 90 days before the effective date of the change; and
- Provide participants with an opportunity after receipt of the notice and before the effective date to change their 401(k) election (30 days is deemed reasonable)
Prohibited Changes to Safe Harbor 401(k) Plans
The following mid-year changes are expressly prohibited, unless required by applicable law:
- Changes to the plan year, adoption of safe harbor status mid-year, and the reduction or suspension of safe-harbor contributions.
- Modifying or adding a matching formula (or changing the definition of compensation used to determine matching contributions) if it would increase the amount of matching contributions. Similarly, a sponsor can’t permit discretionary matching contributions. However, such restrictions don’t apply if (1) the change is made at least three months before the end of the plan year, (2) the updated notice and election requirements are met, and (3) the change is retroactive to the beginning of the plan year.
- Reducing the number of participants eligible to receive safe harbor contributions (except for certain changes under eligibility service crediting rules or entry date rules for participants who are not eligible for safe harbor contributions as of the date of the change).
- Changing the type of safe harbor plan (for example, from traditional 401(k) to a QACA).
- Increasing the number of years of service participants must complete to be fully vested under a qualified automated contribution arrangement (QACA) safe harbor plan.
Interested plan sponsors with safe harbor 401(k) plans will welcome the flexibility Notice 2016-16 provides. The notice doesn’t address mid-year changes in the context of mergers and acquisitions, but the IRS may provide additional guidance in the future.
Interested plan sponsors should consult with a qualified adviser to determine whether a potential mid-year change is allowable but also keep in mind the additional cost of issuing the required special safe harbor notice.
Contact an Untracht Early professional today to discuss how these new rules for safe harbor 401(k) plans can benefit you.