IRS (finally!) Provides Clarity for Mid-year Changes to Safe Harbor Plans

On Friday January 29, the IRS issued Notice 2016-16 which offered the long-awaited guidance on mid-year amendments to 401(k) and 403(b) plans with a safe harbor feature. It substantially softened the IRS prior stance which, with limited exceptions, disallowed mid-year plan modifications if a plan wanted to rely on the safe harbor status in the year the change was contemplated.

The Notice does not revise requirements for the mid-year changes to safe harbor plans which already had been addressed in prior regulations, such as:

  • Adoption of a new safe harbor plan
  • Use of the maybe notice to elect the safe harbor status
  • A mid-year suspension or reduction of safe harbor contributions
  • A mid-year change in the plan year or amendment to a short plan year
  • Mid-year plan termination

The tone of the Notice is unusually liberal; the IRS basically allows any mid-year amendments, provided:

  • The amendment is not specifically listed as impermissible mid-year, such as:
    1. Increasing the number of years of service for vesting purposes for QACA safe harbor contributions;
    2. Reducing the number or otherwise tightening the group of employees eligible to receive safe harbor contributions (NOTE: employers are allowed to amend the plan mid-year to change eligibility requirements – service and entry dates- for employees not yet eligible to receive safe harbor contributions as of the date the change is adopted or effective);
    3. Change in the safe harbor method, e.g. from safe harbor non-elective contribution to safe harbor basic match.
  • When an amendment impacts content of the safe harbor notice:
    1. The plan must provide all participants required to receive a safe harbor notice with an updated safe harbor notice which spells out the change and the date it’s effective;
    2. Upon receipt of the notice, participants must be given a reasonable opportunity to modify their salary deferral elections.
  • Anti-cutback – 411(d)(6), non-discrimination – 401(a)(4), and anti-abuse provisions – 401(k)- 1(b)(3)- are satisfied.

The Service also laid out special rules for the circumstances where employer wishes to:

  • Add a new discretionary match to a plan,
  • Add a new fixed match or Increase plan’s existing fixed match formula,
  • Change the definition of compensation for determination of matching contributions (if it has the effect of increasing the match).

The following requirements must be met:

  • Participants must receive an updated notice at least 90 days before the end of the plan year and should be given a reasonable opportunity to change their salary deferral elections
  • The change must be retroactive to the first day of plan year.  For plans which determine the match on a periodic basis (e.g. per pay roll or monthly), an amendment to calculate the match on a full-year basis with a true-up may be needed.

This welcome development largely aligns with the historical understanding and practice employed in circumstances where plan sponsors wished to make mid-year modifications to their plans; practitioners no longer have to rely on sparse verbal statements on the IRS comfort levels with certain amendments to help retirement programs align with business objectives while remaining in compliance.

The full text of Notice 2016-16 may be found here.