IRS Clears Path for More Midyear Changes in Safe Harbor Plans


Recent guidance from the Internal Revenue Service loosened the reins on the ability of sponsors of Section 401(k) safe harbor plans to amend those plans in midyear.

Subject to certain conditions, mid-year changes to the plan won’t violate the tax code just because they are mid-year changes, the IRS said in Notice 2016-16, issued January 29.

“The notice provides helpful guidance for employers that sponsor safe harbor 401(k) plans and I expect it to be useful,” Jeffrey M. Holdvogt, a partner in the Employee Benefits, Compensation, Labor & Employment Practice Group in the Chicago office of McDermott Will & Emery, told Bloomberg BNA.

Safe harbor plans are exempt from the general nondiscrimination rules requiring that benefits under or contributions to a qualified plan must be nondiscriminatory in amount, provided the plan complies with a separate set of safe harbor plan regulations.

Notice 2016-16 provides guidance on mid-year changes to a safe harbor plan or to a plan’s required safe harbor notice that do not violate those safe harbor plan rules.

Under Notice 2016-16, a “mid-year change” is (i) a change that is effective during a plan year, but not effective as of the beginning of the plan year, or (ii) a change that is effective as of the beginning of the plan year, but adopted after the beginning of the plan year.

Midyear changes to safe harbor plans are subject to two conditions, the IRS said in Notice 2016-16.

The first condition is that the plan must provide an updated safe harbor notice to each employee describing the midyear change and its effective date.  This must be furnished to each employee “within a reasonable period” before the change’s effective date, which the notice explains is at least 30 days but not 90 days before the effective date.

The second condition is that employees receiving the notice of the midyear change must be given a “reasonable opportunity”--30 days--to change their pre-tax elections before the midyear change goes into effect, according to Notice 2016-16.

The notice said that examples of midyear changes that would not violate the tax code rules, provided these conditions are satisfied, include an increase in future safe harbor nonelective contributions from 3 percent to 4 percent for all eligible employees; adding an age 59½ in-service withdrawal feature; and changing the default investment fund in a qualified automatic contribution arrangement (QACA) safe harbor plan with multiple investment options.

Notice 2016-16 opens up possibilities for more mid-year plan amendments, Holdvogt said.

“Prior to the notice, it was not clear whether, for example, safe harbor plan sponsors could amend their plan mid-year to add additional employee groups acquired through a corporate acquisition, or to change administrative procedures,” Holdvogt said.  “Notice 2016-16 should make it much easier for safe harbor plan sponsors to consider mid-year plan amendments, particularly when events outside the plan sponsor’s control (for example, vendor changes to administrative procedures) require mid-year changes.”

Notice 2016-16 is effective for midyear changes made on or after Jan. 29, 2016, and it also applies to Section 403(b) plans that apply the Section 401(m) safe harbor rules.

However, unless specifically required to be made midyear by law or a court decision, the following midyear changes are not allowed under Notice 2016-16:

• increases in the number of completed years of service that are required for an employee to have “a nonforfeitable right to the employee's account balance attributable to safe harbor contributions under” a QACA;

• reductions in or other narrowing of the number of a group of employees who are eligible to get safe harbor contributions; 

• changes from one type of safe harbor plan to another; and

• a modification to the formula used to determine matching contributions if it increases the amount of matching contributions, or one that permits discretionary matching contributions.

For a couple of reasons, mid-year changes won’t become as routine as they are for non-safe harbor plans, Holdvogt said. “First, plan sponsors will need to issue supplemental safe harbor notices describing the mid-year changes, so minor changes that can wait until the start of a new plan year are likely to wait,” he said.  “Second, plan sponsors will still need to consider and consult with advisors as to whether a proposed mid-year amendment is permitted under the new guidance.”

See related story Safe Harbor 401(k) Plans Get Guidance on Midyear Changes.

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