On January 29, 2016, the IRS issued Notice 2016-16 (a copy can be found here), which provides much-needed guidance and flexibility for mid-year amendments to safe harbor plans.  The notice provides that a mid-year amendment either to a safe harbor 401(k) or 403(b) plan or to a 401(k) or 403(b) plan’s safe harbor notice does not violate the safe harbor rules merely because it is a mid-year amendment, provided that (i) applicable notice and election opportunity conditions set forth in the Notice are satisfied and (ii) the mid-year amendment is not a prohibited mid-year amendment under the Notice.

As a general matter, a qualified 401(k) or 403(b) plan that provides for elective deferrals and employer matching contributions must be tested annually to demonstrate that such benefits do not discriminate in favor of highly compensated employees.  Alternatively, a plan may adopt “safe harbor” provisions that grant participants additional employer contributions and rights that excuse the plan from annual testing.  The safe harbor plan rules require that a notice be provided to participants within a reasonable time before each plan year outlining the participants’ rights and obligations including:  the plan’s safe harbor contributions, any other plan contributions, the type and amount of compensation that may be deferred under the plan, how to make cash or deferred elections, the plan’s withdrawal and vesting provisions, and specified contact information for the plan.

IRS regulations provide that a safe harbor plan may not be amended during the plan year to modify the provisions that satisfy the safe harbor plan rules.  Under existing IRS guidance, these regulations have been interpreted broadly to substantially prohibit mid-year amendments to safe harbor plans, with certain limited exceptions.  Presumably, the basis for this interpretation related to the notification rules; a mid-year amendment to a safe harbor plan could allow plan sponsors to unfavorably change plan provisions that were the basis for participant deferral elections.

In Notice 2016-16, however, the IRS relaxes its position on mid-year amendments to safe harbor plans.  But the Notice first carves out certain mid-year amendments that are not permissible for safe harbor plans:

  • A mid-year amendment to increase the number of completed years of service required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement;  
  • A mid-year amendment to reduce the number, or otherwise narrow the group, of employees eligible to receive safe harbor contributions;  
  • A mid-year amendment to change the type of safe harbor plan; and  
  • A mid-year amendment to modify (or add) a formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the amendment increases the amount of matching contributions, or to permit discretionary matching contributions.  This prohibition does not apply if: (i)  the amendment is adopted at least three months prior to the end of the plan year, (ii) a notice and election opportunity is provided, and (iii) the amendment is made retroactively effective for the entire plan year.

If the amendment is not on the prohibited list, a mid-year amendment to a safe harbor plan is permitted so long as an updated safe harbor notice that describes the mid-year amendment is provided and employees are given an opportunity to make elective deferral changes within a reasonable period before the effective date of the amendment.  For this purpose, 30 days (and not more than 90 days) before the effective date of the amendment is deemed reasonable.  If it is not practicable for the updated safe harbor notice and employee deferral opportunity to be provided before the effective date of the amendment (for example, in the case of a mid-year amendment to increase matching contributions retroactively to the beginning of the plan year), the notice is treated as being timely if its provided as soon as practicable, but not later than 30 days after the date the amendment is adopted. 

An additional notice or election opportunity is not required for changes to information that is not required to be contained in a safe harbor notice, even if that information is provided in a plan’s safe harbor notice.  For example, an updated notice and election opportunity is not required for a mid-year amendment to a plan’s rules regarding arbitration disputes as a description of such procedures is not required for a safe harbor notice.

The IRS also requested comments on guidance that may be needed to address mid-year amendments relating to plan sponsors involved in mergers and acquisitions or to plans that include an eligible automatic contribution arrangement.

The new guidance is effective for mid-year amendments made on or after January 29, 2016.