In Notice 2016-16, the Internal Revenue Service (IRS) clarifies permissible mid-year amendments to safe harbor plans. The Notice is intended to alleviate concerns that earlier IRS guidance suggested certain mid-year changes were unacceptable.
In IRS Notice 2016-16, the IRS clarified when mid-year amendments to safe harbor plans and notices are permissible. The Notice:
Describes the mid-year changes permitted under existing guidance.
Provides that mid-year changes to safe harbor plans or safe harbor plan notices are acceptable if:
the mid-year change is not a prohibited change described in Notice 2016-16.
The Notice also provides examples illustrating the mid-year amendment rules.
Safe Harbor Plans
Employers offering 401(k) retirement savings plans to employees must not discriminate in favor of highly compensated employees. To comply with this requirement, 401(k) plans must satisfy complicated nondiscrimination testing rules. However, employers can avoid these burdensome and expensive tests by providing safe harbor employer contributions under Section 401(k)(12) of the Internal Revenue Code (Code) (26 U.S.C. § 401(k)(12)) or safe harbor matching contributions under Code Section 401(m) (safe harbor plans).
Generally, mid-year amendments to safe harbor plans are prohibited (26 C.F.R. § 1.401(k)-3(e)(1)). The safe harbor plan rules provide several exceptions to this rule, including for changes relating to:
Adoption of safe harbor plan status on or after the beginning of the plan year, if notice of this possibility is provided before the beginning of the plan year (26 C.F.R. Sections 1.401(k)-3(f) and 1.401(m)-3(g)).
Notice 2016-16 confirms that these mid-year changes remain permissible, so long as the applicable regulatory and other conditions for the change are satisfied.
Notice 2016-16
Notice 2016-16 explains when a mid-year change to a safe harbor plan or a plan's required safe harbor notice does not violate the safe harbor plan rules.
First effective during the plan year, but not effective as of the beginning of the plan year.
Effective as of the beginning of the plan year, but adopted after the beginning of the plan year. (For example, an increase of matching contributions implemented mid-year but retroactive to the beginning of the plan year).
Mid-Year Notice: Notice Requirements
Notice 2016-16 provides notice and election opportunity requirements for a mid-year changes for all employees otherwise required to be provided a safe harbor notice (affected employees). It does not modify the existing rules governing information required to be in a plan’s safe harbor notice.
It requires:
Notice at least 30 days (and not more than 90 days) before the effective date of the change, unless not practical (in which case, no later than 30 days after the adoption date). An updated safe harbor notice that describes the mid-year change and its effective date must be provided to affected employees least 30 days (and not more than 90 days) before the effective date of the change (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Employee Notice Requirements). If it is not practicable for the updated safe harbor notice to be provided before the effective date of the change (if there is a mid-year change to increase matching contributions retroactively for the entire plan year, for example), the notice is treated as provided timely if it is provided as soon as practicable, but not later than 30 days after the date the change is adopted.
A 30-day election period before the effective date of the change, unless not practical (in which case, an election period that ends no later than 30 days after the adoption date). Each affected employee must be given a reasonable opportunity (including a reasonable period after receipt of the updated notice) before the effective date of the mid-year change to change his cash or deferred election (or any after-tax employee contribution election). If a 30-day election period is not practicable before the effective date of the change, this requirement will be deemed satisfied if the election opportunity begins as soon as practical after the date the updated notice is provided and no later than 30 days after the adoption date of the change.
If the required information about the mid-year change and its effective date was provided with the pre-plan year annual safe harbor notice, an updated safe harbor notice is not required.
Prohibited Mid-Year Changes
Notice 2016-16 provides that the following changes may not be made mid-year under the safe harbor plan rules:
A reduction in the number of employees eligible to receive safe harbor contributions or otherwise narrowing of the group, unless the reduction was a permissible change under eligibility service crediting rules or entry date rules made for employees who are not already eligible to receive safe harbor contributions (as of the date the change is either made effective or is adopted).
A change to the type of safe harbor plan, such as a change from a traditional 401(k) safe harbor plan to a QACA 401(k) safe harbor plan.
The modification or addition of a formula to determine matching contributions (or the definition of compensation used to determine matching contributions) that increases the amount of matching contributions, or a change that permits discretionary matching contributions. However, this mid-year change is permitted if it is made retroactively effective for the entire plan year (which may require a plan that provides for periodic matching contributions as described in 26 C.F.R. Sections 1.401(k)-3(c)(4) and 1.401(k)-3(c)(5)(ii), or 1.401(m)-3(d)(4), to be amended to provide for matching contributions based on the entire plan year) and at least three months before the end of the plan year:
the change is adopted; and
the updated safe harbor notice and election opportunity are provided.
Examples
Notice 2015-16 provides several examples that illustrate the clarifications discussed in the Notice.
An employer sponsoring a traditional safe harbor 401(k) plan does not violate the safe harbor rules when it:
Increases safe harbor nonelective contributions. An employer amends the plan mid-year to increase safe harbor nonelective contributions from 3% to 4% for all eligible employees. The employees otherwise required to be provided a safe harbor notice with both:
an updated notice that describes the increased contribution percentage; and
an additional election opportunity in accordance with Notice 2016-16.
satisfies 26 C.F.R. Sections 1.401(k)-3(g), the plan is no longer a safe harbor plan and is required to satisfy the requisite nondiscrimination testing; and
Adds an in-service withdrawal feature. An employer amends the plan to add an age 59 ½ in-service withdrawal feature. It provides employees otherwise required to be provided a safe harbor notice with both:
an updated notice that describes the withdrawal feature; and
an additional election opportunity in accordance with Notice 2016-16.
Changes the entry date from monthly to quarterly for employees who are not already eligible to participate in the safe harbor plan. This is an example of a permissible mid-year change that is not described in prior guidance or prohibited by Notice 2016-16. Because the safe harbor notice is not required to include the plan entry date and does not impact affected employees, Notice 2016-16 provides that this change does not:
Require an updated notice and additional election opportunity.
Violate the safe harbor rules.
403(b) Plans
Notice 2016-16's clarifications regarding mid-year amendments and notices apply to Code Section 403(b) plans that apply the Code Section 401(m) safe harbor rules under Code Section 403(b)(12).
Effective Date
The Notice applies to mid-year changes to safe harbor plans made on or after January 29, 2016, and revokes IRS Announcement 2007-59, which provided guidance on mid-year changes to safe harbor plans. Although the Notice is effective immediately, it gives plan sponsors up to 30 days after the adoption of a mid-year change to send a notice to participants.
Comment Period
The Notice requests comments on additional guidance that may be needed regarding mid-year changes to safe harbor plans, including guidance addressing mid-year changes relating to:
Plan sponsors involved in mergers and acquisitions.
Plans that include an eligible automatic contribution arrangement under Code Section 414(w).
Comments may be submitted in writing no later than April 28, 2016. Detailed information on how and where to submit comments are included in the Notice.
Practical Implications
The Notice is intended to alleviate concerns that earlier IRS guidance suggested certain mid-year changes were unacceptable. It is helpful to sponsors of safe harbor plans, as well as parties to a transaction involving safe harbor plans, in that it clearly describes the existing types of permissible mid-year changes and provides examples of common scenarios illustrating acceptable mid-year changes to these plans.