Mid-year changes to safe harbor 401(k) plans have long been thought to be available in only very limited circumstances. However, the IRS recently released guidance in Notice 2016-16 that significantly increases the scope of permissible mid-year changes to safe harbor 401(k) plans.
Generally, safe harbor 401(k) plan provisions must be adopted (and participants must be notified) before the first day of the plan year and remain in effect for the entire 12-month plan year. Such a plan generally loses its safe harbor status if changes are made during the plan year. However, the safe harbor regulations set out the following limited exceptions to the general rule:
1. A short first plan year;
2. A change in the plan year;
3. A short final plan year;
4. A delayed adoption of safe harbor plan nonelective contributions; and
5. A mid-year reduction or suspension of safe harbor contributions (which results in a loss of safe harbor plan status).
Now, however, under Notice 2016-16, a mid-year change to a safe harbor 401(k) plan is permitted if it satisfies the following requirements:
1. If it is a change to a plan’s required safe harbor notice content, each employee that is required to be given a safe harbor notice must be given an updated safe harbor notice at least 30 days (and not more than 90 days) before the effective date of the change. If it is not practicable to provide the updated notice before the effective date of the change, then the notice should be given as soon as possible, but in no event later than 30 days after the change is adopted;
2. If an employee is required to be provided an updated notice as described above, such employee must be given a reasonable opportunity before the effective date of the change to change the employee’s cash or deferred election (and/or any after-tax employee contribution election); and
3. The mid-year change must not constitute one of the following prohibited mid-year changes:
a. A change to increase the number of completed years of service required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (a “QACA”);
b. A change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions (not including otherwise permissible changes under eligibility service crediting rules or entry date rules made with respect to employees who are not already eligible);
c. A change to the type of safe harbor plan; or
d. A change (i) to modify (or add) a formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the change increases matching contributions or (ii) to permit discretionary matching contributions. This prohibition does not apply if the change is adopted and the updated notice and election opportunity are provided at least 3 months prior to the end of the plan year and the change is made retroactively for the entire plan year.