Mid-Year Changes To Safe Harbor Plans Liberalized By IRS

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The IRS recently issued a Notice 2016-16 providing guidance on the mid-year changes to Safe Harbor 401(k) plans. The notice clarifies when and under what conditions the changes made will not violate the applicable regulations of the law.

Since the first Safe Harbor plan design was made available in 1999, the IRS has, time and again, been stating that a plan sponsor cannot make mid-year changes to a safe harbor 401(k) plan without a possible loss in plan’s safe harbor and qualified status.  Such restrictive rule has been creating confusion and frustration among the plan sponsors, who often feel the need to make mid-year changes to their plans, for long time. The new guidance marked a prominent change to the IRS’s long-held position on the entire issue.

The Permitted & Prohibited Changes

Mid-Year Changes that are permitted

A mid-year change to a safe harbor 401(k) plan will not result in a plan to lose its safe harbor status as long as:

  1. The change is not categorized under the prohibited mid-year change, as illustrated in the IRS Notice; and
  2. The mid-year changes comply with certain requirements of the notice, like the required safe harbor notice content and the election opportunity conditions.

Following examples will help in understanding the permitted changes easily.

# Adding an age 59½ in-service withdrawal feature is allowed if an updated notice is provided prior to its effective date. Moreover, an additional election opportunity is also provided.

# The plan’s default investment fund for automatic deferral contributions under a QACA Safe Harbor plan is allowed to be changed provided an updated Safe Harbor notice is provided 30 days before the change is intended to be made. Also, an additional election opportunity is provided to the participants.

# The entry date for employees’ participation commencement, those meeting the age and service requirements, can be shifted from monthly to quarterly.  Since the plan entry date doesn’t fall under the required items on the Safe Harbor notice, there’s no need of an updated notice and additional election opportunity. However, the change must be informed to the employees as directed under the DOLs summary of material modification requirements.

Mid-Year Changes that are prohibited

Following is a list of prohibited mid-year changes that are not allowed to be made to a safe harbor 401(k) plan, unless the change is required by law:

  1. Increasing the required years of service in order to become covered in safe harbor contributions made under a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan;
  2. Reducing the number of eligible employees or narrowing the group of eligible employees who qualify to receive safe harbor contributions;
  3. Changing the safe harbor plan type (for example, shifting from a traditional safe harbor plan to a QACA safe harbor plan); and
  4. Modifying the formula or the definition of compensation to determine matching contributions, when the changes increase the matching contribution amount, OR permitting the discretionary matching contributions.

What Effect this New Law will Put on Plan Sponsors?

With the mid-year changes made possible, plan sponsors with safe harbor 401(k) plans are now given an opportunity to make required adjustments to their plans, without having to wait until next year. Also, the plan sponsors, who were previously reluctant in adopting safe harbor plans due to the inflexibility of making mid-year amendments, may now consider a safe harbor plan as an appropriate choice.

Effective Date

The IRS Notice 2016-16 is effective for those mid-year changes that are made on or after January 29, 2016.

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