IRS Liberalizes Rules on Mid-Year Changes to Safe Harbor 401(k) Plans

The IRS recently issued guidance allowing all but a few mid-year changes to safe harbor 401(k) plans.  This new guidance marks a significant change to the IRS’s long-held and much-reviled position on the issue.

Background.  Since the safe harbor plan design first became available in 1999, the IRS has consistently taken the position that a plan sponsor generally may not make mid-year changes to a safe harbor 401(k) plan without causing the plan to lose its safe harbor status and possibly lose its qualified status.  This restrictive position has been a source of confusion and frustration for plan sponsors, who often find that they need to amend their plans mid-year.

Permitted Mid-Year Changes.  The IRS made virtually a complete about-face in Notice 2016-16 (the “IRS Notice”), generally allowing most mid-year changes to safe harbor 401(k) plans.
Under the IRS Notice, a mid-year change to a safe harbor 401(k) plan will not cause the plan to lose its safe harbor status simply because it is a mid-year change, as long as:

• The change is not a prohibited mid-year change, as described in the IRS Notice; and
• If information that is required to be included in the plan’s safe harbor notice will change, participants are provided with an updated safe harbor notice and allowed to change their deferral elections.

Prohibited Mid-Year Changes.  The IRS Notice lists the following as “prohibited mid-year changes” that may not be made to a safe harbor 401(k) plan, unless the mid-year change is required by law:

• Increasing the years of service required to become vested in safe harbor contributions made under a qualified automatic contribution arrangement (“QACA”) safe harbor plan;
• Reducing or narrowing the group of employees eligible to receive safe harbor contributions;
• Changing the type of safe harbor plan (for example, changing from a traditional safe harbor plan to a QACA safe harbor plan); and
• Subject to a limited exception, increasing or adding a fixed matching contribution (or changing the definition of "compensation" used to calculate the contribution) or adding a discretionary matching contribution.

Existing Rules for Discontinuing Safe Harbor Contributions.  The existing safe harbor regulations provide specific rules for mid-year changes to safe harbor contributions.  For example, under certain circumstances, safe harbor matching or non-elective contributions may be discontinued upon advance notice to participants.  The rules for these types of changes were not modified by the IRS Notice.

Effective Date.  The IRS Notice is effective for mid-year changes made on or after January 29, 2016.

Contact Information.  For more information, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870), Teri King (404.888.8847) or Angela Roberts (404.888.8822).

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