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IRS Issues Relief for Safe-Harbor 401(k) 403(b) Plans

Earlier this year, the Internal Revenue Service (“IRS”) released Notice 2016-16 providing greater flexibility to amend safe harbor 401(k) and 403(b) plans mid-year.¹ Plans designed with safe harbor provisions provide relief from performing annual non-discrimination testing and, in some cases, relief from the top-heavy provisions. Prior to the change, IRS regulations severely limited plan sponsors’ ability amend or adopt a safe harbor plan after the first day of the affected plan year.

Background: Safe Harbor Regulations Restrict Amendment Timing

The 401(k) safe harbor regulations generally provide that sponsors may not adopt or amend a safe harbor plan unless the change occurs before the first day of the plan year and the change remains in effect for an entire 12-month plan year, with limited specifically described exceptions.² Additionally, any amendments affecting a 401(k) plan’s safe harbor provisions require a notice to participants within a reasonable time before the beginning of the plan year (generally at least 30 but no more than 30 and 90 days before the beginning of the plan year). Changes also require a special election period for employees if the change limits the frequency or duration of an employee’s deferral elections under the plan. Employees under a special election period must be provided with a 30-day election period to make a change. Failure to comply with the restrictions on mid-year changes risks plan disqualification if the plan cannot pass the required non-discrimination tests.

Although the IRS has allowed some mid-year changes,

Mid-Year Changes Allowed

The new guidance takes an expansive approach. The IRS clarifies that changes made to a safe harbor plan or to a plan’s requirement safe harbor notice content do not violate the regulations merely because the change occurs mid-year. However, mid-year amendments now require timely notice and a new election opportunity. Additionally, the guidance outlines specific changes that are impermissible.

Timing of Notice Requirements and Election Opportunity

Notice 2016-16 did not change the requirements for providing both a notice and an election opportunity when a mid-year change occurs. However, the timing requirements for each must now coincide with the change, and need not be provided prior to the beginning of the plan year. Both the participant notices and election periods must still comply with the notice content requirements found in the safe harbor regulations. When amending a plan mid-year, safe harbor notices must now be provided to each participant within a reasonable period before the effective date of the change. A reasonable period is at least 30 (but not more than 90) days before the effective date of the change. Notices provided after the change are still timely so long as they are provided as soon as practicable, but no later than 30 days after the change is adopted. The timing for a reasonable opportunity to change an employee’s deferral elections must also be within a reasonable period. A 30-day period before the effective date of the change is reasonable, or as soon as practicable, but not later than 30-days after the change is adopted.

Restrictions to Mid-Year Changes

Despite this added flexibility, the IRS continues to prohibit certain mid-year changes, including amendments that would:

(1) Increase the number of completed years of service required for an employee to have a non-forfeitable right to her account balance;

(2) Reduce or narrow the group of employees eligible to receive safe harbor contributions;

(3) Switch to or from the safe harbor plan, i.e. a change from a traditional 401(k) safe harbor to a 401(k) QACA safe harbor plan; or

(4) Modify or add a formula used to determine matching contributions if the changes increase the amount of matching contributions or permit discretionary matching contributions.

Even small changes to a plan can lead to unintended consequences with the plan’s qualified status. It is advisable to speak to your plan’s advisors prior to amending the plan to ensure the change is both beneficial to your employees as well as in compliance with the myriad of rules governing retirement plans.


¹ Safe harbor plans refer to 401(k) plans designed to comply with Code Sects. 401(k)(12), 401(k)(13), 401(m)(11) or 401(m)(12), as well as 403(b) plans designed under 403(b)(12).

² The regulations currently allow mid-year changes including: (1) adopting a short plan year, (2) adoption of safe harbor status on or after the beginning of the plan year, and (3) the reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status

© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of June 30, 2016.

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