IRS Issues Welcome Guidance on Safe Harbor Retirement Plans
IslerDarePC, a premier Virginia-based labor, employment, and employee benefits law boutique firm, recently issued this Employee Benefits Update addressing issues relevant to safe harbor retirement plans. You can download a copy of IRS Notice 2016-16 on the Resources page of our website.
- The IRS recently released welcome guidance in the form of IRS Notice 2016-16 on safe harbor 401(k) and 403(b) plans, which gives employers the ability to make certain midyear changes to their safe harbor plan without jeopardizing the plan’s safe harbor status.
What You Should Do
- If you sponsor a safe harbor 401(k) or 403(b) plan, determine whether there are any discretionary design changes that you want to implement mid-year for business, administrative or other reasons. If so, work closely with your consultants, third-party administrators, and/or legal counsel to (1) determine whether the change is a permissible mid-year change; (2) determine whether an updated safe harbor notice must be distributed and a new election period provided; and (3) properly document and obtain appropriate corporate approvals for the adoption of the change in your safe harbor plan.
- Ensure that any proposed amendment also complies with other applicable laws that may affect the permissibility of the change, such as anti-cutback restrictions, nondiscrimination restrictions, and anti-abuse provisions that also apply to qualified retirement plans.
As a condition to receiving benefits associated with tax-qualified plans, employers who sponsor qualified retirement plans such as 401(k) plans must perform certain non-discrimination tests each year to ensure that the benefits and contributions to the qualified plan are nondiscriminatory. These tests include the actual deferral percentage (“ADP”) test, which applies to elective contributions, and the actual contribution percentage (“ACP”) test, which applies to matching contributions and certain after-tax employee contributions. As an alternative to performing the annual nondiscrimination tests, employers may choose to structure their plan as a safe harbor plan, which generally means that the plan must meet requirements regarding contribution levels and participant notices, as well as, requirements that certain plan provisions be adopted before the first day of the plan year and remain in effect for a 12-month plan year.
Currently, the IRS regulations governing safe harbor 401(k) and 403(b) plans provide for limited exceptions to the general rule that certain plan provisions must be adopted before the first day of the plan year and remain in effect for a 12-month plan year. Specifically, the regulations permit mid-year changes (i.e. those that are first effective during a plan year but not effective as of the beginning of the plan year, or those that are effective as of the beginning of the plan year but adopted after that time), in the following limited scenarios, and only if certain additional requirements are met:
- a short first plan year;
- a change in the plan year;
- a short final plan year;
- a delayed adoption of safe harbor plan nonelective contributions if certain notice requirements are satisfied (this arrangement is often referred to as a “springing” safe harbor plan); and
- a mid-year reduction or suspension of safe harbor plan contributions.
In recent years, the IRS has also issued, periodically, different pieces of sub-regulatory guidance permitting mid-year changes to safe harbor plans for certain specific and narrow circumstances, such as hardship withdrawal changes, designated Roth contribution changes, and changes related to samesex spouses.
Given the very limited exceptions set forth in the regulations and sub-regulatory guidance, employers have been unsure about what kinds of other mid-year changes could be made without jeopardizing a plan’s safe harbor status.
IRS Notice 2016 – 16
Issued at the end of January 2016, IRS Notice 2016-16 provides welcome guidance on the types of changes that employers can make mid-year without causing the loss of a plan’s safe harbor status.
Mid-Year Changes Permitted Except for Certain Specific Categories.
Under this new guidance, a change made to a safe harbor plan or to a plan’s required safe harbor notice content does not cause a plan to lose its safe harbor status, as long as the midyear change is not one of the following:
A mid-year change to increase the number of completed years of service required for an employee to have a nonforfeitable right to the employees’ account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (“QACA”).
- A mid-year change to reduce the number, or otherwise narrow the group, of employees eligible to receive safe harbor contributions. This restriction does not apply to an otherwise permissible change under eligibility service crediting rules or entry date rules with respect to employees who are not yet eligible as of the date the change either is made effective or is adopted.
- A mid-year change to the type of safe harbor plan (e.g. from a traditional 401(k) safe harbor plan to a QACA 401(k) safe harbor plan).
- A mid-year change to (1) 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 (2) to permit discretionary matching contributions. However, this type of change may be made if, at least 3 months prior to the end of the plan year, the change is adopted and the updated safe harbor notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year.
If the permissible mid-year change is one that affects the content of the plan’s original safe harbor notice, then supplemental notice and election opportunity conditions described below must be satisfied.
Updated Notice on Safe Harbor Retirement Plans
The plan sponsor must provide an updated safe harbor notice that describes the mid-year change and its effective date to each employee who is otherwise required to be provided a safe harbor notice. The updated notice must be provided within a reasonable period of time before the effective date of the change, which generally means providing the notice at least 30 days, and no more than 90 days, before the effective date of the change. If it is not practicable for the notice to be provided before the effective date of the change, the IRS notice provides that the updated notice will be considered timely given if provided within 30 days after the change is adopted. This relief may be particularly helpful in the context of a corporate transaction such as a merger or acquisition.
New Election Opportunity
Each employee who gets an updated safe harbor notice must also be given a reasonable opportunity to change his or her deferral election, or any after-tax employee contribution election, before the effective date of the mid-year change. Generally, this means giving the employee at least 30 days to make the election change, before the mid-year change to the plan takes effect. However, the IRS notice provides that if it is not practicable for the election opportunity to be provided before the effective date of the change, the IRS will treat the employee 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, but not later than 30 days after the date the change is adopted.
Practically, the new guidance means that as long as any updated notice and election opportunity requirements are satisfied, employers may make mid-year changes such as increasing the formula for future safe harbor nonelective contributions, adopting a new in-service withdrawal feature, or adding a new participating employer, without concern that the plan will lose its safe harbor status.
Limitations of Notice 2016 – 16
It is important to note that Notice 2016-16 does not change the existing requirements for mid-year changes to safe harbor plans that were already permitted in the IRS regulations, as described above.