The IRS has provided much-anticipated (and welcome) guidance on mid-year amendments to safe-harbor 401(k) plans. This is favorable guidance that provides greater flexibility to employers that sponsor safe-harbor plans.

Brief Background

Safe-harbor 401(k) plans are excused from performing some nondiscrimination tests in exchange for meeting specified criteria, including providing a minimum employer contribution (either a matching contribution or nonelective contribution) and providing eligible employees with a notice each year. Prior guidance from the IRS (mostly informal) has indicated that employers generally could not make mid-year amendments to safe-harbor plans (unless expressly authorized by the IRS) or would risk losing safe-harbor status for that year. This presumption against mid-year amendments appeared to include amendments to plan provisions that did not relate specifically to safe-harbor status.

A Change in the Presumption

New guidance from the IRS reverses the prior presumption that any mid-year amendment to a safe-harbor plan was prohibited unless expressly permitted. Instead the guidance says that most mid-year amendments are permissible, so long as notice and election requirements are met in cases where the change affects the required content of the safe-harbor notice. Specifically, the guidance provides:

“A change made to a safe harbor plan or to a plan’s required safe harbor notice content does not violate the requirements of [the safe-harbor rules] merely because the change is a mid-year change, provided that (i) if it is a mid-year change to a plan’s required safe harbor notice content, the notice and election opportunity conditions [described in the guidance] are satisfied, and (ii) the mid-year change is not described in the list of prohibited mid-year changes [described in the guidance].”

Prohibited and Restricted Amendments

There is a short list of prohibited mid-year amendments. They are:

  1. A mid-year change to increase the vesting requirements under a safe-harbor plan that is a "qualified automatic contribution arrangement" (QACA).
  2. A mid-year change to reduce the number of employees eligible for safe-harbor contributions (although changes that affect future participants are permitted).
  3. A mid-year change from a traditional safe-harbor plan to a QACA (or vice versa).
  4. A mid-year change to increase matching contributions or allow discretionary matching contributions, unless the change is retroactively effective to the beginning of the plan year and is made at least 3 months before the end of the plan year.

In addition, mid-year changes that are already addressed in the 401(k) regulations (e.g., a change in plan year or a reduction or suspension of safe harbor contributions) must follow the existing requirements under the regulations.

Examples

A number of examples illustrate how the guidance is intended to operate. They include the following:

  • A mid-year amendment to increase a safe-harbor nonelective contribution is permissible.
  • A mid-year amendment to add an age 59-1/2 in-service withdrawal feature is permissible.
  • A mid-year amendment to the default investment option under a QACA is permissible.
  • A mid-year amendment to add a non-QACA automatic contribution arrangement is permissible.
  • A mid-year amendment to change from monthly to quarterly entry dates is permissible (and does not require complying the notice and election requirements, because it does not affect the content of the safe-harbor notice).
  • A mid-year amendment to change plan rules regarding arbitration of disputes is permissible (and does not require complying with the notice and election requirements, because it does not affect the content of the safe-harbor notice).

Bottom Line

This is good news for employers with safe-harbor 401(k) plans. Although employers rarely need to amend their plans in the middle of a year, this guidance ensures that they have the flexibility to respond if they find the need to make a mid-year change.

The new guidance is Notice 2016-16 and is available here.