IRS Issues Guidance on Mid-Year Amendments to Certain Safe Harbor Plans

As plans contemplate changes to safe harbor plans in the midst of the COVID-19 pandemic, the IRS has provided some guidance and relief for certain plans. 

 

The IRS on June 29 issued guidance that clarifies the requirements that apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan that reduces only contributions made on behalf of highly compensated employees HCEs. The guidance is contained in Notice 2020-52.

 

Under Treas. Reg. §1.401(k)-3(a), contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. Accordingly, says the IRS, a mid-year change that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions described in Treas. Reg. §1.401(k)-3(g) and Treas. Reg. §1.401(m)-3(h). 

 

However, the IRS in Notice 2020-52 says that a mid-year change that reduces only contributions made on behalf of HCEs would be a mid-year change to a plan’s required safe harbor notice content for purposes of Notice 2016-16. Therefore, in order to satisfy the notice and election opportunity conditions of Notice 2016-16, an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies, determined as of the date of issuance of the updated safe harbor notice.

 

 

Notice 2020-52 also provides temporary relief in connection with the COVID-19 pandemic from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan adopted between March 13, 2020 (the date of the Presidential Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease Outbreak), and Aug. 31, 2020 that reduces or suspends safe harbor contributions. 
 
The notice explains that if a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and Aug. 31, 2020, then the plan will not be treated as failing to satisfy the requirements of Treas. Reg. §1.401(k)-3(g)(1)(ii) or Treas. Reg. §1.401(m)-3(h)(1)(ii) just because a supplemental notice is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective. This applies as long as:

 

Notice 2020-52 does not provide relief regarding the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions under Treas. Reg. §1.401(k)-3(g)(1)(i) or Treas. Reg. §1.401(m)-3(h)(1)(i). The IRS says this is because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions). 

 

403(b) Plans
 
Notice 2020-52 applies to 403(b) plans that apply the Section 401(m) safe harbor rules under Internal Revenue Code Section 403(b)(12).

 

 

Notice 2020-52 will appear in Internal Revenue Bulletin 2020-29 on July 13, 2020.