IRS Expands Ability of Safe Harbor Plan Sponsors to Make Mid-Year Changes

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By Jeffrey M. Holdvogt, Esq., Stephen Pavlick, PC, and Sarah G. Raaii, Esq.

McDermott Will and Emery, Chicago, IL and Washington, D.C.

The IRS recently issued Notice 2016-16, which provides safe harbor 401(k) plan sponsors with increased flexibility to make mid-year plan changes. Notice 2016-16 sets forth new rules for when and how safe harbor plan sponsors may amend their plans to make mid-year changes, a process which traditionally has been subject to significant restrictions.


"Safe harbor" 401(k) plans are exempt from certain nondiscrimination tests (the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests) that otherwise apply to employee elective deferrals and employer matching contributions. In return for these exemptions, safe harbor plans must meet certain requirements, including required levels of contributions, the requirement that plan sponsors provide the so-called "safe harbor notice" to participants, and the requirement that plan provisions remain in effect for a 12-month period, subject to certain limited exceptions.

Historically, the IRS has limited the types of changes that a safe harbor plan sponsor may make mid-year due to the requirement that safe harbor plan provisions remain in effect for a 12-month period. The 401(k) regulations provide that the following mid-year changes are prohibited, unless applicable regulatory conditions are met:

  •   Adoption of a short plan year or any change to the plan year
  •   Adoption of safe harbor status on or after the beginning of the plan year
  •   The reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status

The IRS has occasionally published exceptions to the limitations on mid-year changes. For example, plan sponsors were permitted to make mid-year changes to cover same-sex spouses following the Supreme Court of the United States' decision in United States v. Windsor in 2013.


Aside from these limited exceptions, safe harbor plan sponsors were generally not permitted to make mid-year changes.  This led to some difficulties for plan sponsors, particularly in situations where events outside the plan sponsor's control might ordinarily cause a plan sponsor to want to make a mid-year plan change.

Permissible Mid-Year Changes

Notice 2016-16 clarifies that certain changes to safe harbor plans made on or after January 29, 2016, including changes that alter the content of a plan's required safe harbor notice, do not violate the safe harbor qualification requirements simply because they occur mid-year. A "mid-year change" for this purpose includes (1) a change that is first effective during a plan year, but not effective at the beginning of a plan year, or (2) a change that is effective retroactive to the beginning of the plan year, but adopted after the beginning of the plan year.

Mid-year changes that alter the plan's required safe harbor notice content must meet two additional requirements:

1. The plan sponsor must provide an updated safe harbor notice that describes the mid-year change and its effective date must be provided to each employee required to receive a safe harbor notice within a reasonable period before the effective date of the change. The timing requirement is deemed satisfied if the notice is provided at least 30 days, and no more than 90 days, before the effective date of the change.

2. Each employee required to be provided a safe harbor notice must also have a reasonable opportunity (including a reasonable time after receipt of the updated notice) before the effective date of the mid-year change to change the employee's cash or deferred election. Again, this timing requirement is deemed satisfied if the election period is at least 30 days.

Mid-year changes that do not alter the content of the required safe harbor notice do not require the issuance of a special safe harbor notice or a new election opportunity.

Prohibited Mid-Year Changes

Certain mid-year changes remain prohibited, including:

  •   A mid-year change to increase the number of years of service that an employee must accrue to be vested in the employee's account balance under a qualified automatic contribution arrangement (QACA) safe harbor plan;
  •   A mid-year change to reduce the number of employees eligible to receive safe harbor contributions;
  •   A mid-year change to the type of safe harbor plan, such as changing from a traditional 401(k) safe harbor plan to a QACA;
  •   A mid-year change to modify or add a matching contribution formula, or the definition of compensation used to determine matching contributions if the change increases the amount of matching contributions; and
  •   A mid-year change to permit discretionary matching contributions.

In addition, mid-year changes that are already subject to conditions under the 401(k) and 401(m) regulations (including changes to the plan year, the adoption of safe harbor status mid-plan year, and the reduction or suspension of safe harbor contributions, as described above) are still prohibited, unless applicable regulatory conditions are met. These changes are also not subject to the special notice and election opportunity requirements.


Notice 2016-16 fundamentally changes the rules regarding mid-year changes to safe harbor 401(k) plans. Prior to Notice 2016-16, mid-year changes were assumed to be impermissible, subject to the limited exceptions described above. Going forward, however, mid-year changes that are not specifically prohibited are permitted, so long as the notice requirements, where applicable, are met, and other regulatory requirements are not violated.

Notice 2016-16 should prove particularly helpful for safe harbor plan sponsors that have struggled with the limitations imposed on safe harbor plans by the inability to make mid-year changes when non-safe harbor plans would do so (for example, if a record-keeper changes administrative procedures or other events outside the plan sponsor's control require mid-year changes). However, safe harbor plan sponsors wishing to make mid-year changes will still need to consult with advisors to determine whether a proposed amendment is permissible, or whether the amendment is subject to additional regulatory requirements. In addition, plan sponsors wishing to make a mid-year change that would alter the plan's required safe harbor notice content must assume the additional cost of issuing a special safe harbor notice and must plan ahead to make sure the supplemental notice is delivered on time.

The IRS is also requesting comment on additional guidance that may be needed with respect to mid-year changes to safe-harbor plans, and specifically as to whether additional guidance is needed to address mid-year changes relating to plan sponsors involved in mergers and acquisitions or to plans that include an eligible automatic contribution arrangement under §414(w). Comments may be submitted in writing not later than April 28, 2016.

For more information, in the Tax Management Portfolios, see Bortz, Mason, and Raish, 358 T.M., Cash or Deferred Arrangements,  and in Tax Practice Series, see ¶5520, Plan Qualification Requirements.

© 2016 McDermott Will & Emery