For many years, plan sponsors, service providers, and practitioners have debated whether mid-year amendments to “safe harbor plans” are permissible given the limited available guidance on this issue.  The concern has been that a mid-year amendment could cause a plan to lose its safe harbor status, which would subject the plan to nondiscrimination testing requirements.  Fortunately, the IRS issued additional guidance in Notice 2016-16 that specifies permissible mid-year amendments to safe harbor plans (including both 401(k) and 403(b) plans), the time at which updated safe harbor notices and election opportunities are required, and the type of mid-year amendments that are prohibited.

Notice 2016-16 Permits…

  • Mid-year amendments to plan provisions that do not impact the content of the safe harbor notice; and
  • Certain mid-year amendments to plan provisions that impact the content of the safe harbor notice (which generally do not change the safe harbor contribution provisions), but only if an updated safe harbor notice and election opportunity is provided to participants.

But Prohibits…

  • Mid-year amendments that directly impact safe harbor contributions (other than the current exception for nonelective safe harbor contributions); and
  • Mid-year amendments to increase matching contributions or add discretionary matching contributions, except in limited circumstances.

Read on for details.

What is a “Safe Harbor Plan”?

A safe harbor plan is a plan that includes a cash or deferred arrangement that is not subject to certain nondiscrimination testing requirements under the Internal Revenue Code (“Code”).  Specifically, safe harbor plans are not subject to nondiscrimination testing under Code Section 401(k) (“ADP testing”) and/or Code Section 401(m) (“ACP testing”) (and, in some cases, the “top-heavy” plan requirements under Code Section 416) because safe harbor plans satisfy certain other requirements under the Code and the Treasury Regulations.  These requirements generally relate to contribution levels, vesting provisions, continuity of specific plan provisions for the entire 12-month plan year, and participant safe harbor notices.

The participant safe harbor notice requirements are generally satisfied if eligible employees are provided with a notice that meets certain content and timing requirements.  The required content includes information about the plan’s safe harbor contributions, any other plan contributions, the type and amount of compensation that may be deferred under the plan, procedures for making deferral elections, distribution and vesting provisions, and specified contact information.

Prior to Notice 2016-16, Were Mid-Year Amendments to Safe Harbor Plans Permitted?

Generally, safe harbor plans must adopt the plan provisions necessary to satisfy the safe harbor requirements prior to the first day of the plan year.  Those provisions must remain in effect for the entire 12-month plan year.  Certain exceptions to this rule existed prior to Notice 2016-16, including in the following situations: (i) plans with a short first or final plan year; (ii) a change in plan year; or (iii) a mid-year adoption of safe harbor nonelective contributions (provided that required notice was given).  Any other mid-year amendment to safe harbor plan provisions was thought to potentially cause a plan to lose its safe harbor plan status, resulting in the need for nondiscrimination testing. Therefore, the possibility of losing safe harbor status historically has deterred plan sponsors from making any mid-year plan amendments.  This was true even when such amendments did not directly impact the provisions necessary to satisfy the safe harbor plan status.

What’s New in Notice 2016-16?

Notice 2016-16 clarifies that mid-year amendments to safe harbor plans do not result in a loss of safe harbor plan status if (i) the amendment is not prohibited under the Notice and (ii) participants are provided with an updated safe harbor notice and an election opportunity when the amendment affects the content of the safe harbor notice.

Drinker Biddle Note: A mid-year amendment to a safe harbor plan, which does not affect the content of the safe harbor notice and is not prohibited, does not require an updated safe harbor notice and does not affect the safe harbor status of the plan.

When Do Updated Notice and Election Opportunity Requirements Arise?

In the case of a mid-year amendment to a safe harbor plan that affects the content of the safe harbor notice (and is not a prohibited amendment), the plan will not lose its safe harbor status if an updated safe harbor notice is provided. The notice must describe the mid-year change and be given to employees within a reasonable period of time before the effective date of the amendment. In general, the “reasonable period” requirement is deemed satisfied if the updated notice is provided at least 30 days, and not more than 90 days, prior to the effective date of the amendment. It is important to note that information regarding a mid-year change can be provided with the pre-plan year annual safe harbor notice.  In such case, no updated safe harbor notice is required because notice of the change has already been provided to employees.

Each employee who receives an updated safe harbor notice must be given a reasonable opportunity, after receipt of the notice and before the effective date of the notice, to change his or her contribution elections. Generally, a 30-day election period for making or changing deferral elections is considered reasonable.  However, in some cases, the election period cannot be provided before the effective date of the change.  Under these circumstances, the election opportunity must begin as soon as practicable after the employee is provided with the notice. The election opportunity ends no later than 30 days after the date that the amendment is adopted.

Drinker Biddle Note: From a practical standpoint, safe harbor plans that allow participants to make contribution election changes at any time may not be affected by this requirement.

Which Mid-Year Changes are Prohibited for Safe Harbor Plans? 

Notice 2016-16 provides that certain mid-year plan changes are prohibited and will affect safe harbor status.  Those changes include:

  • A change to increase the number of completed years of service required for an employee to become vested in safe harbor contributions under a qualified automatic contribution arrangement (QACA);
  • A change to reduce the number of employees eligible to receive safe harbor contributions (which is not otherwise specifically permissible);
  • A change to the type of safe harbor plan; and
  • A change to increase matching contributions, add discretionary contributions or change the definition of compensation used to determine matching contributions, unless (i) the amendment is adopted at least three months prior to the end of the plan year, (ii) is retroactive for the entire plan year, and (iii) the updated safe harbor notice and election opportunity are provided.  

What are Some Examples?

Mid-year Plan Amendments That Do Not Require an Updated Safe Harbor Notice

  • An amendment to change the plan entry date from monthly to quarterly for employees who are not yet participants in a plan; and
  • An amendment to add a statute of limitations to the claims procedures in a plan.

Mid-year Plan Amendments That Require Updated Safe Harbor Notices and Election Opportunities

  • An amendment to increase the amount of nonelective contributions;
  • An amendment to permit in-service withdrawals at age 59 1/2; and
  • An amendment to permit installments as a form of distribution.

Mid-Year Plan Amendments That Are Prohibited

  • An amendment to change from a QACA safe harbor plan to a traditional safe harbor plan;
  • An amendment to change from immediate vesting to two-year cliff vesting in a QACA safe harbor plan; and
  • An amendment to add discretionary matching contributions to a plan that is adopted on the last day of a plan year.

What’s Next?

The IRS is requesting comments by April 18, 2016, on additional guidance that may be needed regarding mid-year changes to safe harbor plans.  In particular, specific comments are requested in regard to mid-year changes that relate to plans involved in corporate transactions and plans that include an eligible automatic contribution arrangement.  Plan sponsors now have some flexibility in making mid-year amendments to safe harbor plans, but should remain mindful of the guidelines for such amendments, in order to avoid a loss of safe harbor status, which would subject the plan to nondiscrimination testing requirements.