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Mid-Year Changes to Safe Harbor Plans or Safe Harbor Notices

Overview of Notice 2016-16 providing guidance on mid-year changes to safe harbor plans and safe harbor notices that do not violate the safe harbor rules merely by being a mid-year change.

IRC Sections and Treas. Regulation

Resources

Analysis

A 401(k) or 401(m) plan that complies with the requirements in IRC §§ 401(k)(12) or 401(k)(13) and/or 401(m)(11) or 401(m)(12) is a safe harbor plan and is exempt from ADP and/or ACP testing, depending upon the design of the plan. Among the safe harbor requirements is a general requirement that certain safe harbor plan amendments cannot be adopted “mid-year,” after the beginning of the plan year for which the safe harbor advance notice has been given.

As discussed below, some guidance had been issued addressing mid-year changes prior to Notice 2016-16 (“Notice”). Notice 2016-16, which was issued on January 29, 2016, provides guidance on mid-year changes to a safe harbor plan and safe harbor notice.

Background

Reg. § 1.401(k)-3(e)(1) provides in relevant part that “a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section, unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year.” See also Reg. § 1.401(m)-3(f)(1).

Several exceptions to this rule are in the regulations. See Reg. §§ 1.401(k)-3(e)(2), (3), and (4), 1.401(k)-3(f) and (g), 1.401(m)-3(f)(2), (3), and (4), and 1.401(m)-3(g) and (h). For example, a short first or final plan year can be implemented without violating the safe harbor rules if the change meets the requirements in the regulation. See Reg. §§ 1.401(k)-3(e)(2) and (4) and 1.401(m)-3(f)(2) and (4). Other guidance discussed exceptions for mid-year changes relating to hardship withdrawals, designated Roth contributions, and same-sex spouses. See Announcement 2007-59, Notice 2010-84, Notice 2013-74, and Notice 2014-37.1

Notice 2016-16 provides that a mid-year change to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is 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 as listed in the Notice.

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.

A mid-year change is defined as a change that is effective during a plan year, but is not effective as of the beginning of the plan year, or a change that is effective as of the beginning of the plan year, but is adopted after the beginning of the plan year. Effective with Notice 2016-16, a mid-year change generally requires an updated safe harbor notice and an additional election period if the change involves content that is required to be included in the safe harbor notice.
Section III.D describes a number of prohibited mid-year changes, which cannot be made unless required by applicable law to be made mid-year, such as a change mandated by a statutory law change or court decision. Examples of prohibited mid-year changes include a change to increase the number of completed years of service required to vest in safe harbor contributions, or a change to reduce or otherwise narrow the employees eligible to receive safe harbor contributions.

Notice requirement

An updated notice is not required if the change involves content that is not required to be in a safe harbor notice, even if the information is otherwise included in the plan’s safe harbor notice. See Notice Requirements for Safe Harbor 401(k) Plans  for a detailed discussion on the notice requirement for safe harbor plans.

If required, the updated notice must describe the mid-year change and the effective date of the change. It must be provided to each employee otherwise required to be provided a safe harbor notice, within a reasonable period before the effective date of the change. Whether this timing requirement is met is based on all of the relevant facts and circumstances, but this timing requirement is deemed to be satisfied if the updated safe harbor notice is provided at least 30 days (and not more than 90 days) before the effective date of the change.

If it is not practicable for the updated safe harbor notice to be provided before the effective date of the change, the notice is treated as provided timely if it is provided as soon as practicable, but not later than 30 days after the date the change is adopted.

If the required information about the mid-year change and its effective date was provided with the pre-plan year annual safe harbor notice, an updated safe harbor notice is not required.

Election requirement

In addition to an updated notice, each employee required to be provided an updated notice must be provided with a reasonable opportunity to change his or her cash or deferred election (and/or any after-tax employee contribution election) after receipt of the updated notice, and before the effective date of the mid-year change. For this purpose, a 30-day election period is deemed to be a reasonable period to make or change a cash or deferred election.

If it is not practicable for the election opportunity to be provided before the effective date of the change (such as in the case of a retroactive amendment), an employee is treated as having a reasonable opportunity to make or change an election if the election opportunity begins as soon as practicable after the date the updated notice is provided to the employee, but not later than 30 days after the date the change is adopted.

Prohibited mid-year changes

The Notice provides the following list of “prohibited mid-year changes” that may not be made to a safe harbor plan, unless the change is required by applicable law or court decision.

  • A mid-year change increasing the years of service for the vesting schedule for a safe harbor plan consisting of a Qualified Automatic Contribution Arrangement (QACA);
  • A mid-year change to reduce or narrow the group of employees eligible to receive safe harbor contributions; however, this does not limit the ability of the employer to amend a plan mid-year to change eligibility service crediting rules or entry date rules for employees who have not yet become eligible to receive safe harbor contributions;
  • A mid-year change to the type of safe harbor, for example, a change from a traditional safe harbor to a QACA, or vice versa;
  • A mid-year change to modify (or add) a formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the change increases the amount of matching contributions, or to permit discretionary matching contributions. However, a plan may make such a mid-year change if:

a. the change is adopted at least 3 months before the end of the plan year,
b. the change is made retroactive for the entire plan year, and
c. the plan sponsor gives an updated safe harbor notice and additional election opportunities to each employee otherwise required to be provided a safe harbor notice at least 3 months prior to the end of the plan year.

Other applicable law also may affect the permissibility of mid-year changes, including, for example, IRC § 411(d)(6) (anti-cutback restrictions), IRC § 401(a)(4) (nondiscrimination restrictions), and Reg. § 1.401(k)-1(b)(3) (anti-abuse provisions).

Examples of mid-year changes that do not violate the safe harbor rules

The following examples of changes do not violate the safe harbor rules, but require an updated notice and additional election opportunity because the change involves content that is required to be included in a safe harbor notice:

  • Increase future safe harbor nonelective contributions from 3% to 4% for all eligible employees.
  • Add an age 59 ½ in-service withdrawal feature.
  • Change the default investment fund provider in a QACA safe harbor plan.

The following examples of mid-year changes also do not violate the safe harbor rules, but they do not require an updated notice and election because the content being changed is not required to be included in a safe harbor notice:

  • Alter the plan rules on arbitration of disputes.
  • Shift the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly, provided that the amendment is limited to employees who are not already eligible to participate in the safe harbor plan.

Detailed examples

Example 1: Increase in safe harbor nonelective contributions

The employer sponsoring Plan M, a traditional 401(k) safe harbor plan, makes a mid-year plan amendment to increase future safe harbor nonelective contributions from 3% to 4% for all eligible employees. An updated safe harbor notice is provided to all eligible employees that describes the increased contribution percentage, and an additional election opportunity is also provided in compliance with Notice 2016-16. Therefore, this mid-year change does not violate the provisions of Reg. §§ 1.401(k)-3 and 1.401(m)-3. 

Example 2: Retroactive increase in safe harbor matching contribution and change in period for calculating the matching contribution

The employer sponsoring Plan O, a traditional 401(k) and traditional matching safe harbor plan with a calendar year plan year and match calculated on a payroll-period basis, makes a mid-year amendment on August 31, 2016, to increase the safe harbor matching contribution from 4% to 5% retroactive to January 1, 2016, and to amend the plan to change from a payroll-period match calculation to an entire-plan-year match calculation. Due to the retroactive effective date of the change, it is not practicable for the plan to provide an updated safe harbor notice and additional election opportunity to employees prior to the January 1, 2016, effective date. On September 3, 2016, the first date that an updated notice and additional election opportunity can practicably be provided, employees otherwise required to be provided a safe harbor notice are provided an updated notice that describes the increased contribution percentage and an additional 30-day election period starting September 3, 2016, in accordance with the Notice. The mid-year change does not violate the provisions of Reg. §§ 1.401(k)-3 and 1.401(m)-3, because the amendment to increase the matching rate is not an impermissible change and update notices and an election period were provided as soon as practicable.

Although it is beyond the scope of this Issue Snapshot, Notice 2016-16 also applies to IRC § 403(b) plans that apply the IRC § 401(m) safe harbor rules pursuant to IRC § 403(b)(12).

Audit tips

  1. Review the mid-year change and verify that it does not violate the mid-year change rules. In order to do this, first determine if it is covered by Reg. § 1.401(k)-3(e)(2), (3), or (4), 1.401(k)-3(f) or (g), 1.401(m)-3(f)(2), (3), or (4), or 1.401(m)-3(g) or (h). If the change is covered by those regulations, determine if the additional conditions in the regulations have been complied with.

  2. If the mid-year change is not covered by the regulation subsections in item 1 above, determine if the change is limited under IRC § 411(d)(6) (anti-cutback restrictions), IRC § 401(a)(4) (nondiscrimination restrictions), Reg. § 1.401(k)-1(b)(3) (anti-abuse provisions), or other provisions in the IRC or regulations.

  3. If the mid-year change is not covered by item 1 and is not limited by issues under item 2 above, determine if the change is prohibited under section III.D of the Notice. (See Discussion of section III.D under Background, above). If it is not prohibited, follow the remaining items below.

  4. Determine if the change affects content that is required to be included in a safe harbor notice. If so, ask to see a copy of the updated notice and election forms. Ensure that the notice satisfies the content requirement.

  5. Ask for proof that the updated notices were provided to employees otherwise required to be provided a safe harbor notice and when they were provided. Determine if the dates the updated notices were provided are consistent with the time limitations in the Notice. If it was not practicable to provide the notice prior to the effective date, such as when a plan amendment is retroactively effective to the beginning of the plan year, determine if the notice was provided as soon as practicable, but not later than 30 days after the date the change was adopted.

  6. Ask for proof that the employees given the updated notice were given, if applicable, a reasonable election opportunity. Determine if the election opportunity was provided consistent with the time limitations in the Notice. If it was not practicable to provide the election opportunity prior to the effective date, such as when a plan amendment is retroactively effective to the beginning of the plan year, determine if the election opportunity, if applicable, was provided as soon as practicable after the updated notice was provided, but not later than 30 days after the date the change was adopted.

1Announcement 2007-59 provided that a plan will not fail the safe harbor requirements merely because of a mid-year change to implement certain qualified Roth contributions and hardship withdrawals.  Announcement 2007-59 was revoked by Notice 2016-16. Thus, the type of mid-year changes described in Announcement 2007-59 now must meet the requirements of Notice 2016-16.