Safe Harbor 401(k) Plan Mid-Year Amendments

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By Ethan Branum, CIP

I am working with an employer that has a three month eligibility requirement for elective deferrals and their safe harbor contribution for the company’s 401(k) plan. They are looking to increase eligibility to one year of service with 1,000 hours. Can the safe harbor 401(k) plan be amended mid-year to do so?

Yes. Safe harbor 401(k) plan eligibility criteria can be changed at any time. Before the issuance of IRS Notice 2016-16, there was little guidance on amending a safe harbor 401(k) plan mid-year. Based on Treasury regulations, a safe harbor 401(k) plan had to be maintained for an entire plan year, so conservatively that meant it was not permissible to make any modifications during the plan year. The IRS subsequently issued Notice 2016-16, which provided much needed guidance on mid-year amendments to safe harbor 401(k) plans.

The notice indicates that there are several conditions for amending mid-year. First, the amendment may not

  • violate the anti-cutback, anti-abuse, or nondiscrimination rules;

  • make QACA Safe Harbor 401(k) plan vesting more restrictive;

  • reduce or eliminate eligibility for those participants already eligible for the safe harbor contribution; or

  • change the type of safe harbor contribution formula (e.g., matching contribution to nonelective).

Second, if the amendment requires content changes in the safe harbor notice, an updated notice and Summary Plan Description (SPD) must be provided and a 30-day window to change deferral elections must be allowed. Finally, if the content in the safe harbor notice wasn’t affected and the proposed change did not conflict with the first set of conditions, the amendment could be implemented at any time during the plan year. Since eligibility conditions aren’t required information on the safe harbor notice, this type of amendment could be implemented at any time during the plan year with no effect to the status of the safe harbor 401(k) Plan.

We have an employer that is having a “plus year” and wants to increase the safe harbor nonelective contribution from 3 to 5 percent. Can they do this mid-year?

While we would generally have said no before the recent guidance, IRS notice 2016-16 now indicates that it is permitted, but the employer must comply with a few requirements. An employer can amend to increase the safe harbor formula mid-year if they make this effective at least three months before the plan year end. Furthermore, this new formula would be required to be applied for the entire plan year, not just from the effective date of the amendment. Last, the plan must provide an updated safe harbor notice, updated SPD, and provide a new deferral election period.

Employers must keep one thing in mind—if the plan funds its safe harbor contribution on a periodic basis (i.e. per payroll), then in order to amend mid-year it must fund the amended safe harbor contribution no later than the quarter following the quarter the contribution is for.  This could complicate amending to raise the level of nonelective contribution for the current year.  If the employer waits too long to amend, it would be unable to meet this requirement. For example, a January, February, or March periodically-made contribution would have to be made under such amendment by the end of June (the end of the second quarter following the quarter the contribution is for).

If the employer is willing to switch from making periodic (i.e., payroll-timed) contributions to making contributions at end-of-year—by its tax return deadline, including extensions—then the amendment can be made later in the year.  Remember, it must apply to the nonelective contribution for the entire year.