In January 2016, the IRS released Notice 2016-16, announcing the general permissibility of mid-year amendments to “safe harbor” 401(k) plans. Safe harbor plans covered by the Notice include those using a traditional safe harbor design to satisfy 401(k) plan nondiscrimination testing as well as those using a qualified automatic contribution arrangement (QACA). Notice 2016-16 is applicable to mid-year changes made after January 29, 2016.

Prior to Notice 2016-16, the reasons for which safe harbor plans could be amended mid-year were severely limited. Permitted amendments included those related to a short first plan year, a change to the plan year, or a final plan year; the delayed adoption of safe harbor non-elective contributions for a plan year (if made in accordance with the applicable notice requirements); and the mid-year adoption of certain Roth deferral, rollover, or transfer features and hardship withdrawals. Any other mid-year amendments to a safe harbor plan jeopardized its status.

Under the Notice, the IRS expands the conditions under which mid-year changes may be made to a safe harbor plan. The Notice also identifies those mid-year changes that are or remain prohibited.

Conditions Applicable To Permissible Mid-Year Changes.

A mid-year change is defined in the Notice as any change that either is (1) first effective during a plan year, but not effective as of the first day of the plan year, or (2) effective as of the beginning of the plan year, but adopted after the beginning of the plan year.

If a mid-year amendment changes any information required to be provided in the plan’s safe harbor notice, an updated safe harbor notice must be provided that describes the change and its effective date within a “reasonable” period before the change is effective. In addition, each employee who is required to receive the notice must be given a reasonable opportunity in advance of the effective date of the amendment to modify his or her deferral election.

If a permitted mid-year change is adopted that does not modify the information required to be provided in the plan’s annual safe harbor notice, no updated notice or election period must be provided. Note also that the additional notice and election requirements do not apply to mid-year changes to information that is not required to be included in safe harbor notice, even if the information was included in the safe harbor notice.

The timing requirement for the notice will, in general, be deemed to be met if the updated notice is provided at least 30, but no more than 90, days before the effective date of the change. The IRS states that a 30-day period prior to the effective date of the change during which a participant can make changes to his or her deferral elections will be deemed to be reasonable.

In certain situations where it is not practicable to provide the notice in advance of the effective date of the change, such as a retroactive increase in the matching contribution rate (see discussion in bullet point 4, below), the notice will be treated as delivered timely if it is delivered as soon as practicable after the amendment is adopted, but within 30 days of the change. A participant’s deferral election window in that instance will be considered reasonable if it begins as soon as practicable after the notice is delivered, but not more than 30 days after the change is adopted. For plans that permit employees to change their deferral elections frequently (such as daily or every payroll period), this election window requirement will be easy to satisfy.

Impermissible Mid-Year Changes

The following mid-year changes to a safe harbor plan are prohibited, unless the change is required by law:

1. A change that would increase the number of years of service an employee must complete in order to vest in his or her account balance attributable to safe harbor contributions under a QACA safe harbor plan design;
2. A reduction in the number of employees who are eligible to receive safe harbor contributions, or any other narrowing of the eligible group. This does not apply to permissible changes related to eligibility service crediting rules or entry date rules applicable to those employees who are not yet eligible to receive safe harbor contributions as of the date of the change;
3. A change in the type of safe harbor plan design (traditional or QACA); and
4. A change to modify or add a formula used to determine matching contributions (or to change the definition of compensation used to determine matching contributions), or to permit discretionary matching contributions, unless (a) the change is adopted and notice is provided at least three months before the end of the plan year in which the change is to go into effect, and (b) the change is made retroactively effective for the entire plan year.

The Notice does not override any other applicable law that might make a mid-year change impermissible, such as anti-cutback restrictions, non-discrimination restrictions, or anti-abuse provisions.

What Does This Mean to You?

The guidance in Notice 2016-16 provides plan sponsors with needed flexibility to make mid-year changes to safe harbor plan provisions, provided that the applicable notice and election requirements are met, and the change is not otherwise impermissible.