Since its availability, many 401(k) plan sponsors, particularly smaller employers have adopted a “Safe Harbor” plan design under Code Section 401(k)(12) or (13) and 401(m)(11) or (12). Safe Harbor plan designs include both a fully vested 3% qualified non-elective employer contribution or a fully vested employer matching contribution equal to 100% of employee deferrals on the first 3% and 50% of employee deferrals over 3% and less than or equal to 5%.  The final 401(k) regulations Safe Harbor provisions describe the advance of the plan year notice (generally a 30 day notice requirement) and state the rule that if elected, the Safe Harbor provisions must be in effect for the entire 12 month plan year.  The regulations outline a few narrow exceptions (i.e. short initial plan years or a change in plan year).  There is also a special rule that allows employers to provide a “maybe” notice in the advance of plan year and then to adopt the 3% employer non-elective contribution Safe Harbor prior to the end of the plan year.

Informally at employee benefit conferences IRS representatives have suggested that any other changes to a Safe Harbor 401(k) Plan during a plan year would invalidate the Safe Harbor protection which allows plan sponsors to avoid annual nondiscrimination testing on deferrals and matching contributions. Employers who made changes during the year risked failing the Safe Harbor provisions under audit.

In IRS Notice 2016-16 (the “Notice”), https://www.irs.gov/pub/irs-drop/n-16-16.pdf the IRS expanded the available changes that may be made without invalidating an existing Safe Harbor election.  Under the new guidance, certain mid-year changes may be made so long as an additional updated Safe Harbor notice is provided at least 30 days in advance of the change and plan participants are given the opportunity to modify their deferral elections in response to the plan changes.  Of course, employers who allow election changes any time during the plan year will have already met the requirement to provide participants with election opportunities after the change.  Other changes are permitted with notice only, without notice and without having to give participants additional election opportunities.  The Notice also states which mid-year changes are prohibited even under the new rules.  These are:

  1. A change to the vesting rules for certain Safe Harbor contributions under a Qualified Automatic Contribution Arrangement (QACA);
  2. A mid-year change to reduce the group of employees eligible to receive Safe Harbor contributions (however this prohibition does not restrict design changes to revise entry dates or service requirements for employees who are not yet eligible as of the date of change);
  3. Mid-year changes to the type of safe harbor plan, i.e. a change from a traditional Safe Harbor plan to an automatic Safe Harbor contribution plan (and presumably a change from a Safe Harbor QACA to a Safe Harbor matching formula).

Some of the helpful examples in the Notice of changes that will now be permitted are:

Example 4. A mid-year amendment to add an age 59½ in-service withdrawal feature would be permitted if the updated notice is provided in advance of its effective date and the additional election opportunity is provided.

Example 5. A mid-year change to the plan’s default investment fund for automatic deferral contributions under a QACA Safe Harbor plan would be permitted if the updated Safe Harbor notice is provided 30 days before the change and the participants are given the additional election opportunity.

Example 7. A mid-year amendment to change the entry date for commencement of participation for employees meeting the age and service requirements from monthly to quarterly.  Since the plan entry date is not one of the required items on the Safe Harbor notice, an updated Safe Harbor notice and additional election opportunity is not required.  This change would be required to be disclosed to employees under the Department of Labor’s summary of material modification requirements, however.

It was comforting to note that the principal author of the recent notice is Cynthia A. Van Bogaert in the Office of Associate Chief Counsel. Prior to her government employment, Cynthia was a long time private practitioner with years of experience advising employers on 401(k) plan compliance.  The recent Notice and the examples provided are reflective of common changes that plan sponsors seek to implement during Safe Harbor plan years.  This guidance will provide direction to plan advisors as to which type of changes can be implemented other than at the beginning of a plan year.