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Issue Snapshot - Notice Requirement for a Safe Harbor 401(k) or 401(m) Plan

This snapshot discusses the criteria for a permissible notice for a safe harbor 401(k) or 401(m) plan.

IRC Sections and Treas. Regulations

Resources

Analysis

A safe harbor 401(k) plan is a plan that includes a cash or deferred arrangement described in IRC § 401(k)(12) (traditional 401(k) safe harbor) or IRC § 401(k)(13) (qualified automatic contribution arrangement (“QACA”) safe harbor). A safe harbor 401(m) plan is described in IRC § 401(m)(11) (traditional matching safe harbor) or § 401(m)(12) (QACA matching safe harbor). Safe harbor plans are deemed to satisfy the ADP test for elective contributions and/or the ACP test for matching contributions. A safe harbor plan must meet certain requirements under Reg. §§ 1.401(k)-3 and/or 1.401(m)-3, including notice requirements.

General requirements

The annual notice requirement is satisfied if each employee eligible to participate is given, within a reasonable period before the beginning of the plan year, written notice of the employee's rights and obligations under the plan, and the notice meets certain content and timing requirements. Special timing rules apply for employees who become eligible during the year. The notice may be provided electronically.

Notice 2016-16 provides additional guidance regarding the rules for mid-year changes to safe harbor 401(k)/(m) plans and notices. As discussed below, an updated notice is required if a safe harbor 401(k) or 401(m) plan or notice is changed mid-year, and the mid-year change affects the content that is required to be in the safe harbor notice.

Required content

The notice must be sufficiently accurate and comprehensive to apprise an employee of his or her rights and obligations under the plan.

For both a traditional safe harbor notice and a QACA safe harbor notice, the notice must contain the following information:

  • The safe harbor matching or nonelective contribution formula used in the plan,
     
  • Any other contributions under the plan, or matching contributions to another plan on account of contributions under the plan, including the potential for discretionary matching contributions, and the conditions under which the contributions are made,
     
  • The plan to which safe harbor contributions will be made if different from the 401(k) plan,
     
  • The type and amount of compensation that may be deferred,
     
  • How to make deferral elections, including any administrative requirements that apply to the elections,
     
  • The periods available under the plan for making elections,
     
  • The withdrawal and vesting provisions applicable to contributions under the plan, and
     
  • Information that makes it easy to obtain additional information about the plan (including an additional copy of the summary plan description (SPD)), such as telephone numbers, e-mail addresses and mailing addresses of individuals or offices from whom employees can obtain such plan information.

A safe harbor notice may cross reference the plan's SPD for information regarding any other contributions under the plan (including the potential for a discretionary matching contribution) and the conditions under which such contributions are made, the plan to which the safe harbor contributions are made, if different from the 401(k) plan, and the type and amount of compensation that may be deferred.

The following additional information is required to be in a notice for a QACA safe harbor plan:

  • The level of elective contributions which will be made on the employee's behalf in the absence of an affirmative election;
     
  • The employee's right to elect not to have elective contributions made on the employee's behalf (or to elect to have such contributions made in a different amount or percentage of compensation); and
     
  • How contributions under the automatic contribution arrangement will be invested (including, in the case of an arrangement under which the employee may elect among 2 or more investment options, how contributions will be invested in the absence of an investment election by the employee).

Timing requirement

General Rule: Generally, the safe harbor notice must be provided within a reasonable period before the beginning of the plan year. The timing requirement is deemed to be satisfied if the notice is provided at least 30 days (and not more than 90 days) before the beginning of each plan year. If the notice is not provided within this time frame, whether the notice is timely depends upon all of the relevant facts and circumstances.

If the employee becomes eligible after the 90th day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes eligible and no later than the employee’s date of eligibility. This rule also applies to the first plan year of a new 401(k) plan, with respect to employees for that first plan year.

In some cases, it may not be practicable for the notice to be provided on or before an employee’s eligibility date. This is likely to be the case for a plan that allows an employee to participate on his or her date of hire. The regulations state that, in this situation, the notice will nonetheless be treated as provided timely if it is provided as soon as practicable after that date and the employee is permitted to elect to defer from all types of compensation that may be deferred under the plan earned beginning on the employee’s eligibility date.

QACA Notice: A QACA notice satisfies the timing requirements only if it is provided sufficiently early so that the employee has a reasonable period of time after receiving the notice to elect changes to the automatic contribution and/or investment. The plan may not permit a default election effective any later than (1) the earlier of the pay date for the second payroll period that begins after the date the notice is provided, and (2) the first pay date that occurs at least 30 days after the notice is provided.

Additional notice requirements apply in other circumstances affecting certain plan designs. For example, plans which provide the contingent safe harbor plan notice (sometimes referred to as the “Maybe Notice”) are subject to separate notice requirements. See Treas. Reg. § 1.401(k)-3(f). Plans which reduce or suspend safe harbor contributions are subject to separate rules under Treas. Reg. § 1.401(k)-3(g) and § 1.401(m)-3(h). See Reg. §§ 1.401(k)-3(f) and (g) and 1.401(m)-3(g) and (h) for content and timing rules.

Electronic delivery of notice

The safe harbor notice may be delivered electronically. The requirements for electronic delivery are set forth in Reg. § 1.401(a)-21.

Notice requirement due to mid-year changes to a plan

Notice 2016-16, issued on January 29, 2016, provides guidance on mid-year changes to safe harbor 401(k) plans. For purposes of this Notice, a mid-year change is:

  • A change that is first effective during a plan year, but 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 adopted after the beginning of the plan year.

See Mid-Year Changes to Safe Harbor Plans or Safe Harbor Notices for a detailed discussion of Notice 2016-16.

Notice 2016-16 does not require an updated safe harbor notice for every mid-year change. Instead, an updated safe harbor notice that describes the mid-year change and its effective date is required only when the mid-year change affects information that is required by the safe harbor regulations to be included in a plan’s safe harbor notice (and the mid-year change and its effective date were not described in the pre-plan year annual safe harbor notice).

Example 1:  A mid-year amendment changes the entry date for commencement of participation for employees meeting the age and service requirements from monthly to quarterly. The amendment also changes the plan rules regarding arbitration of disputes. Since these items are not required to be included in the safe harbor notice, an updated notice is not required.

Example 2:  An updated notice would be required if the mid-year amendment increased future safe harbor nonelective contributions from 3% to 4% for all eligible employees. See discussion above for a list of items that are required to be included in a safe harbor notice.

Notice timing. If an updated safe harbor notice is required, 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 or not a period is reasonable is based on all facts and circumstances, but the requirement is deemed to be satisfied if the notice is provided at least 30 (and not more than 90 days) before the effective date of the change. However, if it is not practicable for the updated 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.

Example: A traditional safe harbor plan is amended mid-year on August 31, 2016, to increase the safe harbor matching contribution from 4% to 5% retroactive to January 1, 2016. The employer generally is required to provide an updated safe harbor notice within a reasonable period BEFORE the effective date of the change. Due to the retroactive effective date of the change, it is not practicable to provide an updated safe harbor notice prior to the January 1 effective date. On September 3, 2016, the first date that an updated notice and additional election opportunity can practicably be provided, an updated notice is provided to all employees otherwise required to be provided a notice that describes the increased contribution percentage and effective date. It also gives an additional 30-day election period starting September 3, 2016. Based on all of the relevant facts and circumstances, this updated safe harbor notice satisfies the timing requirements of Notice 2016-16.

Audit tips

  1. Review the notice to ensure that it is sufficiently accurate and comprehensive to inform the employee of the employee's rights and obligations under the plan. Verify whether the notice was written in a manner calculated to be understood by the average employee eligible to participate in the plan.
     
  2. Ensure that the notice contains information that meets minimum content requirement in Reg. § 1.401(k)-3(d)(2) for a traditional safe harbor plan and Reg. § 1.401(k)-3(k) for a QACA.
     
  3. Review any mid-year changes to the plan and notice. Determine if the changes require an updated safe harbor notice. Review the updated safe harbor notice (if any) to see if it correctly reflects the mid-year change.
     
  4. Verify whether the notice was sent within a reasonable period before the beginning of each plan year under Reg. § 1.401(k)-3(d)(3), or before the effective date of the change in case of the mid-year changes to safe harbor 401(k) plans.
     
  5. Interview the employer to determine how and when notice was provided; if mailed, inspect documents to determine if the notice was timely mailed.
     
  6. If a safe harbor notice is not sent within 30 to 90 days before the beginning of the plan or before the effective date of change for updated safe harbor notice, ensure that the notice satisfies the timing requirement based on all of the relevant facts and circumstances.
     
  7. If the safe harbor notice is sent using electronic media, ensure that the following requirements of Reg. § 1.401(a)-21(a)(5) and either Reg. §1.401(a)-21(b) or (c) are met:
     
    1. Ensure that the electronic system is designed to provide the notice in a manner no less understandable to the employee than a written paper document,
       
    2. Ensure that the electronic system is designed to alert the employee, at the time the notice is provided, to its significance and to provide any instructions needed to access the notice, in a manner that is readily understandable, and
       
    3. Ensure that either (i) the employee has the effective ability to access the electronic medium providing the notice, and that, at the time the notice is provided, the employee is advised that he or she may request and receive the notice on a written paper document at no charge, and that, upon request, the notice is provided at no charge; or (ii) the consent requirements of Reg. § 1.401(a)-21(b) are satisfied.