IRS Relief Available for Midyear Contribution Changes to Safe Harbor 401(k)s

In response to the COVID-19 crisis, the IRS recently issued Notice 2020-52. It offers sponsors of safe harbor 401(k) plans with temporary relief from certain requirements applicable to midyear reductions or suspensions of contributions. The guidance also clarifies the requirements for midyear contribution reductions (during or after the pandemic) that affect only highly compensated employees (HCEs) participating in such plans.

Permissible amendments

IRS regulations generally require a plan’s safe harbor provisions to remain in effect for an entire 12-month plan year and prohibit midyear plan amendments to those provisions. But midyear amendments to reduce or suspend contributions may be permitted if:

  • The employer is operating at an economic loss, or
  • The plan’s notice regarding employee rights and obligations includes a statement that the plan may be amended during the plan year to suspend or reduce safe harbor contributions.

Safe harbor plans that are amended to reduce or suspend contributions must also meet other requirements — such as having to provide eligible employees with a “supplemental notice” explaining the consequences of the amendment, the procedures for changing contribution elections and the effective date of the amendment.

Supplemental notice Notice 2020-52 provides that an amendment to reduce or suspend safe harbor matching contributions or safe harbor nonelective contributions for a plan year won’t violate the rule limiting midyear amendments to situations in which the employer is either operating at an economic loss or has included the required statement in the plan’s safe harbor notice. This is provided the amendment is adopted between March 13, 2020, and August 31, 2020. In addition, plans may be amended (during the same period) to reduce or suspend safe harbor nonelective contributions without providing a supplemental notice at least 30 days before the reduction or suspension, so long as this notice is provided by August 31, 2020, and the amendment isn’t retroactive.

Delayed notices aren’t permitted for plans reducing or suspending safe harbor matching contributions, because those contributions affect employees’ contribution decisions. Separately, the guidance clarifies that contributions made on behalf of HCEs aren’t considered safe harbor contributions and can be reduced or suspended without regard to the limits on amendments to safe harbor contributions. A reduction or suspension for HCEs would, however, alter content that’s required to be included in a plan’s safe harbor notice. So, affected HCEs would have to be given an updated safe harbor notice and an opportunity to change their contribution elections.

SECURE Act impact

Those familiar with the SECURE Act will remember that it eliminated the safe harbor notice requirement for plan years beginning after 2019 for plans that provide safe harbor nonelective contributions. Notice 2020-52 acknowledges this but declines to address the act’s impact on the discussion of benefit reductions limited to HCEs, leaving some doubt as to whether the notice obligations to HCEs might be further reduced for some plans that rely on nonelective contributions. Our firm can provide further information. © 2020