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Mid-year Changes to Safe Harbor 401(k) Plans and Notices

Notice 2016-16 helps plan sponsors comply with the safe harbor plan and notice rules when making mid-year changes. It generally provides that a mid-year change to a safe harbor plan or to a plan’s safe harbor notice doesn’t violate the safe harbor rules merely because it’s a mid-year change if:

  • the plan satisfies the notice and election opportunity conditions, if applicable, and
  • the change is not a prohibited mid-year change listed in Notice 2016-16.

Some changes, such as reduction or suspension of safe harbor contributions, adding or dropping safe harbor status, or changes in plan years, are permitted only as described in existing regulations.

Background

401(k) or 401(m) retirement plans can satisfy the nondiscrimination in amount rules through a safe harbor structure that includes required contributions, either as specified matching or non-elective employer contributions, and nonforfeitability requirements applicable to the type of safe harbor selected. Safe harbors also include limits on mid-year changes and a requirement to provide notice to plan participants explaining the safe harbor feature.

Notice rules for mid-year changes

If the mid-year change is to a plan’s required safe harbor notice content, the plan sponsor generally must:

  • provide an updated safe harbor notice that describes the mid-year change and its effective date within a reasonable period  before the effective date of the change to each employee that must otherwise receive a safe harbor notice. Providing the notice 30-90 days before the effective date is deemed reasonable.
  • give each notified employee a reasonable period of time to change their cash or deferral  election after receipt and before the effective date of the change.   A 30-day election period is deemed reasonable.

Notice 2016-16 includes special rules if it is not practicable to provide notice or election opportunities in advance of the effective date.

Examples of permissible mid-year changes

If they satisfy the notice rules, if applicable, safe harbor 401(k) plans sponsors may mid-year:

  1. Increase future safe harbor non-elective contributions from 3% to 4% for all eligible employees.
  2. Add an age 59 ½ in-service withdrawal feature.
  3. Change the plan’s default investment fund.
  4. Alter the plan rules on arbitration of disputes.
  5. Shift the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly.
  6. Adopt mid-year amendments required by applicable law (for example, statutory law changes or court decisions).

Examples of impermissible mid-year changes

Safe harbor 401(k) plan sponsors generally can’t mid-year:

  1. Increase an employee’s required number of completed years of service to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA).
  2. Reduce the number (or otherwise narrow) the group of employees eligible to receive safe harbor contributions. This prohibition doesn’t apply to an otherwise permissible change under either eligibility service crediting or entry date rules made for employees who aren’t already eligible (as of either the effective or adopted date of the change) to receive safe harbor contributions under the plan.
  3. Change the type of safe harbor plan, for example, from a traditional safe harbor plan to a QACA 401(k) safe harbor plan.
  4. Modify (or add) a formula for determining matching contributions (or the plan’s definition of compensation used to determine matching contributions) if the change increases the amount of matching contributions, or permit discretionary matching contributions. However, a plan isn’t limited if the:
    • change is adopted at least 3 months before the end of the plan year,
    • change is made retroactive for the entire plan year, and
    • the plan sponsor gives an updated safe harbor notice and election opportunities at least 3 months prior to the end of the plan year.

Additional resources

 

Page Last Reviewed or Updated: 02-Aug-2016