COVID-19 Safe Harbor and Other Relief but Action May Be Needed

Updated: May 1

Just as we went to press, the IRS issued a cornucopia of helpful COVID-19 guidance, including relief specifically allowing mid-year amendments to safe harbor 401(k) plans, but only if action is taken prior to August 31, 2020. See: IRS Notice 2020-52 and further details below. In addition, the IRS has broadly expanded the definition of a “qualified individual” for purposes of eligibility for a COVID-19 distribution to include certain affected spouses and household members and employees who experience pay cuts (where hours were not cut), among others (IRS Notice 2020-50), and extended the rollover deadline for certain participants who took required minimum distributions early in the year to August 31, 2020(IRS Notice 2020-51). Copies of the new IRS Notices are available here:


IRS Notice 2020-50 (June 23, 2020)

IRS Notice 2020-51 (June 23, 2020)

IRS Notice 2020-52 (June 29, 2020)


New COVID-19 Relief for Safe Harbor 401(k) Plans


The IRS issued Notice 2020-52 (the “Notice”) on June 29, 2020 addressing mid-year suspensions and reductions of safe harbor contributions to 401(k) plans. Specifically, in light of the COVID-19 pandemic the Notice provides (or clarifies) relief in the following three areas:

  1. Contributions Affecting Only HCES. The Notice permits the reduction or elimination of safe harbor contributions made solely on behalf of Highly Compensated Employees (“HCEs”). The Plan must provide an updated safe harbor notice and an election opportunity to the affected HCEs. This new guidance clarifies the general application of the safe harbor rules and is not limited to the COVID-19 period.

  2. Mid-Year Amendments OK’d. A plan may be amended to reduce or suspend safe harbor contributions between March 31, 2020 and August 31, 2020 (the “Relief Period”) without satisfying the pre-conditions that (a) the employer be operating at an economic loss, or (b) the plan’s safe harbor notice included language providing for a reduction or suspension of safe harbor contributions.

  3. 30-Day Notices Waived. The Notice removes the 30-day supplemental notice requirement for elimination or suspension of safe harbor nonelective contributions during the Relief Period provided that: (a) the supplemental notice is furnished no later than August 31, 2020, and (b) the amendment reducing or suspending safe harbor nonelective contributions is adopted no later than the effective date of the change. The 30-day supplemental notice requirement is not waived for plans providing safe harbor matching contributions because the safe harbor matching contribution levels affect employee decisions relating to elective deferrals

Plans that reduce or suspend safe harbor contributions under the temporary relief provided in items 2 and 3 must fund safe harbor contributions through the effective date of the amendment, must satisfy the applicable ADP and ACP tests for the year, and will be ineligible for the top-heavy exemption. Plans that reduce or suspend safe harbor contributions under the relief provided in item 1 will continue to maintain their safe harbor status for the plan year.


As background, 401(k) plans that satisfy the safe harbor contribution and notice requirements are exempt from ADP and ACP non-discrimination tests that apply to elective deferrals and matching contributions, respectively. Under certain circumstances, such plans are also exempt from the top-heavy rules of IRC § 416. Generally, safe harbor plan provisions must be adopted before the plan year, and remain in effect for an entire 12-month plan year. Only limited mid-year amendments are allowed that will preserve the plan’s safe harbor status. See IRS Notice 2016-16.


Further, if an ongoing safe harbor plan wishes to modify or eliminate safe harbor contributions, prior to issuance of the Notice, it could only do so if the employer is operating at an economic loss or the safe harbor notice provided prior to the beginning of the year stated that the employer may suspend or reduce the safe harbor contributions with a 30 day supplemental notice. The Notice provides relief from some of these requirements and eases the economic burden on the employer in the midst of the COVID-19 pandemic.


Whereas the relief provided under items 2 and 3 above are temporary and relate to the COVID-19 pandemic, item 1 pertaining to the reduction of HCE contributions is a general clarification. The relief provided in the Notice also applies to 403(b) Plans that satisfy the IRC § 401(m) safe harbor rules pursuant to IRC § 403(b)(12).


Conclusion


The relief offered by the IRS is welcome news to plan sponsors who are striving to maintain economic stability in these stressful times. Please contact our attorneys if you have questions about relief available under these Notices, or about the numerous other relief measures made available to your employee benefit plans by several government agencies. See: Deadline Extensions for Retirement Plans on Account of COVID-19.



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