IRS Issues Limited 401(k) Safe Harbor Plan Relief for COVID-19

Legal Alert

June 29, 2020

Safe Harbor 401k

On June 29, 2020, the IRS created a limited window during which plan sponsors will have some additional opportunities to make changes to their safe harbor 401(k) plans. Following is a summary of the specific relief:

Reduction or Elimination of Safe Harbor Contributions. In general, safe harbor contributions may be reduced or eliminated during a plan year only if (i) the plan’s safe harbor notice includes a statement about this possibility, or (ii) the plan sponsor is operating at an economic loss. However, if a plan is amended to reduce or eliminate safe harbor contributions between March 13, 2020, and August 31, 2020, the IRS will deem these requirements to have been satisfied.

Note that reducing or eliminating safe harbor contributions will subject the plan to the ADP and ACP tests for the full year, and a participant notice about the suspension or elimination will be required. The timing of the participant notice will depend on whether the plan uses safe harbor matching contributions or safe harbor nonelective contributions.

Safe Harbor Matching Contributions. If the plan uses safe harbor matching contributions, the normal notice rules will apply, and participants are required to be notified at least 30 days before the change.
Safe Harbor Nonelective Contributions. As an exception to the normal notice rules, participants can be notified as late as August 31, 2020, about a change to safe harbor nonelective contributions. However, the amendment to eliminate or reduce safe harbor nonelective contributions still must be adopted before the change is effective.

Reduction or Elimination of Safe Harbor Contributions for Highly Compensated Employees (HCEs). Unrelated to COVID-19, the IRS confirmed that contributions made for HCEs are not safe harbor contributions and may be discontinued during the year without jeopardizing the plan’s safe harbor status. However, the IRS notes that reducing or eliminating safe harbor contributions for HCEs will require a supplemental safe harbor notice be provided at least 30 days before the change is effective.

If you have questions about making changes to safe harbor 401(k) plans, please contact your Executive Compensation and Employee Benefits Counsel at Smith, Gambrell & Russell, LLP.