Know the Rules If Changing a Safe Harbor Plan Mid-Year
By Leslie Valenzuela
What is a safe harbor plan?
A safe harbor plan is a 401(k) or 403(b) plan that requires an employer to make a specific mandatory contribution to participants in the plan. By doing so, the plan is exempt from IRS annual compliance testing: the actual deferral percentage (ADP) test and the actual contribution percentage (ACP) test. The plan will also be deemed to satisfy the top-heavy minimum contribution requirement if the safe harbor contribution is the only employer contribution funded.
Is it possible to reduce or suspend safe harbor contributions mid-year?
Yes, an employer may reduce or suspend safe harbor contributions when one of these conditions is met:
The employer is operating at an economic loss.
The safe harbor notice that is provided before the start of the plan year includes a statement that the employer may reduce or suspend contributions mid-year.
Due to the negative economic effects on some businesses as a result of the coronavirus (COVID-19) pandemic, recent IRS Notice 2020-52 provides temporary relief for a mid-year reduction or suspension of safe harbor contributions. Notice 2020-52 explains that employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions will not be considered to have violated the economic loss or pre-plan year notice requirements described above.
If reducing or suspending safe harbor contributions, the employer normally must do the following (special relief was temporarily granted by the IRS, as noted below).
Provide a supplemental notice to eligible employees 30 days before the effective date of the suspension or reduction of benefits. Notice 2020-52 provides temporary relief for employers that amended or will amend their plans for a mid-year reduction or suspension of nonelective contributions without providing a supplemental notice to employees at least 30 days before the reduction or suspension. The notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.
Fund safe harbor contributions through the effective date of the change.
Give employees reasonable opportunity to change their deferral election before the reduction or suspension of benefits.
Complete ADP and ACP tests for the full plan year in which the reduction or suspension occurs.
Meet top-heavy minimum requirements for the full plan year in which the reduction or suspension occurs.
Can a safe harbor 401(k) plan be amended for other plan provisions mid-year?
It depends. Only if certain conditions are met may the employer be able to amend a safe harbor 401(k) plan mid-year.
If the amendment will affect the content of the safe harbor notice provided at the beginning of the plan year, the employer must distribute a new notice to eligible employees 30–90 days ahead of the effective date of the amendment. Also, employers must give employees a reasonable opportunity to change their deferral election before the effective date of the amendment.
According to IRS Notice 2016-16, some changes are prohibited mid-year:
A change that will violate the anti-cutback, anti-abuse, or nondiscrimination rules
A change to increase the number of years of service required for an employee to become vested in safe harbor contributions under a qualified automatic contribution arrangement (QACA)
A change that will reduce or eliminate safe harbor eligibility coverage for those participants already eligible for safe harbor benefits
A change that will switch the type of safe harbor from traditional to QACA or vice-versa
Is it possible to add safe harbor provisions mid-year?
Yes, if certain conditions are met.
A new 401(k) or 403(b) plan or a plan adding a deferral feature for the first time may only add safe harbor mid-year if the plan is not a successor plan, and the safe harbor contribution will be a nonelective contribution of at least three percent. This employer contribution is not contingent on employee deferrals. If it is a new plan adding safe harbor contributions, the cash or deferred arrangement has to be made effective no later than three months before the end of the plan year.
Employers may amend their existing plan to a safe harbor plan mid-year without prior notice, as long as the employer makes a nonelective contribution. Employers should keep two deadlines in mind when adding nonelective contributions mid-year.
At least 30 days before the end of the plan year, the employer may amend its plan with a safe harbor nonelective contribution of at least three percent.
After the first deadline passes, but before the close of the following plan year, the employer may still amend its plan with a nonelective contribution of at least four percent.
As mentioned above, there are options for employers looking to reduce, eliminate, modify, or add safe harbor contributions in a plan. Ascensus recommend that employers review specific terms of their plan document and follow rules set forth by the IRS before processing an amendment.
