Permitted Mid-Year Changes to Safe Harbor 401(k) and 403(b) Plans

Susan D. Diehl

On Jan. 29, 2016, the IRS released Notice 2016-16 which provides new guidance on what can and cannot be amended in a safe harbor 401(k) or 403(b) mid-year. It is effective for mid-year amendments made on or after Jan. 29, 2016.

The notice includes guidance for traditional safe harbor plans and qualified automatic contribution arrangements (QACAs). The new rule eliminates much of the uncertainty which has overshadowed this popular plan design for years. Over the years many financial organizations, TPAs and trade associations (including the American Retirement Association) have submitted comments to the IRS requesting some relaxing of the rules. This guidance provides that. As a matter of fact it permits mid-year amendments with very few exceptions.

What Is a Mid-Year Amendment?

A mid-year amendment is:

• a change that is effective during a plan year and not the beginning of the plan year; or

• a change that is effective as of the beginning of the plan year, but adopted after the beginning of the plan year

Acceptable Mid-Year Amendments Before Jan. 29, 2016

Before this notice the only mid-year amendments that were permitted were the following:

• mid-year adoption of a new safe harbor plan;

• amending to add a Roth deferral option, including IRRs (In-Plan-Roth Rollovers);

• amending the plan to conform with the definition of spouse and the Windsor decision;

• adoption of a short plan year or a mid-year change in the plan; year

• mid-year reduction or suspension of safe harbor contributions (exiting);

• mid-year plan termination; or

• use of the maybe notice to change to safe harbor status.

New Permitted Mid-Year Amendments

In general, the notice permits almost all “mid-year changes,” defined as a change that is either:

• effective on a day other that the first day of a plan year, or

• a change effective on the first day of a plan year but adopted after the beginning of the year.

Therefore, the notice allows changes (both to the plan itself and to other changes that are “required safe harbor notice content”) an employer adopts during the plan year, as well as retroactive corrective amendments adopted after the end of a year.

For example changes may be made to the following items that will also require a new notice to participants:

• plan amendments to add a distribution option,

• changes to contact information which the regulations require to be part of the safe harbor notice, and

• changes to default investments, which the regulations require to be part of a QACA notice.

If the mid-year change would affect required safe harbor notice content, then there are certain requirements to be satisfied as far as providing all participants the required safe harbor notice update as well as a reasonable opportunity after receipt of the updated notice to change their deferral elections within 30-90 days before the effective date.

The notice provides that a few mid-year changes are not permitted:

• a change from a traditional safe harbor to a QACA, or vice versa; however the addition of an automatic enrollment feature to a traditional safe harbor plan is permitted;

• an amendment that would violate the anti-cutback rule;

• a change to the vesting schedule that increases the number of years for 100% vesting for QACA safe harbor contributions; or

• a change reducing the number or otherwise narrowing group of employees eligible to receive safe harbor contributions. However, this does not limit the ability of the employer to amend a plan mid-year to change eligibility requirements for employees who have not yet become eligible to receive safe harbor contributions.

IRS Requests Comments

IRS has asked for comments and whether additional guidance is necessary in this area. They specifically are requesting comments on mid-year changes that involve a merger or acquisition, and plans that currently have an eligible automatic contribution arrangement (EACA) for auto enrollment.

Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services; Chair, NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.