IRS Provides Welcome Guidance on Mid-Year Amendments to Safe Harbor 401(k) Plans

by Littler
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The IRS recently issued Notice 2016-16 (the “Notice”), which permits most mid-year amendments to safe harbor 401(k) plans.  This is welcome news to sponsors of safe harbor 401(k) plans who, prior to the issuance of the Notice, faced uncertainty over whether any mid-year changes to their plan would invalidate the plan’s safe harbor status.

The Notice provides that a safe harbor plan may generally be amended mid-year if the following conditions are satisfied:

  1. if the mid-year amendment is a change to the information required to be in the plan’s safe harbor notice, participants are provided with an updated safe harbor notice at least 30 days (but no more than 90 days) in advance of the change and are provided with the opportunity to modify their deferral elections in response to the plan changes; and
  2. the mid-year change is not one of the prohibited changes listed in the Notice.

The conditions listed above do not apply to certain changes that are already covered by the Treasury Regulations, such as adoption of a short plan year, change in plan year, adoption of safe harbor plan status after beginning of the plan year, reduction or suspension of contributions, or changes from safe harbor plan status to non-safe-harbor plan status.

Pursuant to the Notice, the following mid-year changes are not permitted:

  1. an increase in the vesting requirements for safe harbor contributions under a qualified automatic contribution arrangement;
  2. a reduction or narrowing of the group of individuals eligible to receive safe harbor contributions, other than a change affecting individuals who are not yet eligible to participate in the plan;
  3. a change in the type of safe harbor plan; and
  4. adding or increasing a matching contribution formula, unless the change is effective retroactively to the beginning of the plan year, and the matching contributions will be “trued up” for contributions made prior to the change.

The guidance in the Notice is effective for changes made on or after January 29, 2016.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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