IRS Updates Guidance on Certain Midyear Changes to Safe Harbor Plans

by McGuireWoods LLP

The Internal Revenue Service (IRS) recently issued Notice 2016-16 (the Notice) to provide updated guidance as to when midyear changes to a safe harbor 401(k) plan or 403(b) plan will not violate applicable regulations. According to the Notice, a midyear change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the regulations merely because it is a midyear change, if applicable notice and election opportunity conditions are satisfied and the change is not a prohibited midyear change. The Notice is effective for midyear changes made on and after Jan. 29, 2016.


In recent years, 401(k) and 403(b) plans that provide a “safe harbor” employer contribution have become very popular. The primary advantage of safe harbor status for a 401(k) plan is that the plan is deemed to satisfy the time-consuming and costly “ADP” nondiscrimination test (as to employee salary deferrals, including deferrals that are “designated Roth contributions”) and the “ACP” test (as to employer matching contributions and employee non-Roth after-tax contributions). This “automatic pass” of the nondiscrimination tests means that highly compensated employees can maximize their salary deferrals to the plan each year, regardless of what non-highly compensated employees choose to defer. For a 403(b) plan, only the ACP test applies, and if the plan is a safe harbor plan, it will be deemed to satisfy that test.

In order to receive this automatic pass, a traditional safe harbor plan must meet a number of requirements, including minimum employer contributions, immediate vesting and annual participant notice requirements. The participant notices must be provided within a reasonable time before each plan year, outlining the participants’ rights and obligations under the plan, including an explanation of: (i) the safe harbor and other plan contributions; (ii) the type and amount of compensation that may be deferred to the plan; (iii) the procedures for making and changing salary deferral elections; (iv) the plan’s withdrawal and vesting rules; and (v) how to obtain other information about the plan. In general, safe harbor plan provisions must be adopted before the beginning of the plan year and must remain in effect for the entire plan year.

Unfortunately for safe harbor plan sponsors, it has not been clear whether and when it is permissible to make a midyear change, i.e., a change that is first effective after the beginning of the plan year, or a change that is effective as of the beginning of the plan year, but adopted later in the plan year. Prior guidance confirmed that plan sponsors could add hardship withdrawal or Roth contribution options midyear without violating the safe harbor rules. However, it was not clear whether plan sponsors could make other midyear changes, such as extending coverage to employee groups added through company acquisitions, adopting amendments required for plan qualification or enhancing existing benefits during the year. Presumably, the IRS was concerned about plan sponsors making changes to plan provisions that participants relied upon in making their deferral elections. As a result of this uncertainty, plan sponsors simply delayed many changes until the following plan year, including changes that could be beneficial to plan participants, such as increasing the amount of employer contributions or adding new distribution features.

The Notice provides that a plan sponsor may make certain midyear changes to a safe harbor plan, and to the required information in its safe harbor notice, without violating the safe harbor regulations, provided:

  • the sponsor complies with certain notice and participant election opportunity requirements if the change impacts the required information in the safe harbor notice; and
  • the midyear change is not a prohibited midyear change.

No special action is necessary if the plan sponsor makes a change to any non-required information in its safe harbor notice.

Participant Required Notice and Election Opportunity

The Notice provides that in order to make a midyear change affecting the required information in the plan’s safe harbor notice, the plan sponsor must do the following:

  • Issue to each eligible employee a new safe harbor notice that describes the midyear change and specifies the effective date of the change. The notice must be issued within a “reasonable period” before the effective date of the change. A “reasonable period” is determined based on all the facts and circumstances, but is deemed to be satisfied if the new safe harbor notice is provided at least 30 days and not more than 90 days before the effective date of the change. If it is not practicable for the updated safe harbor notice to be provided before the effective date of the change (for example, in the case of a midyear change to increase matching contributions retroactively to the beginning of the plan year), the notice is treated as timely if it is provided as soon as practicable, but not more than 30 days after the date the change is adopted.
  • Give each employee a reasonable opportunity (including a reasonable period after receipt of the updated notice) before the effective date of the midyear change to change his or her deferral election (and/or any after-tax employee contribution election). For this purpose, a 30-day election period is deemed to be a reasonable period to make or change such an election. If it is not practicable for the election opportunity to be provided before the effective date of the change (for example, in the case of a midyear change to increase matching contributions retroactively for the entire plan year), an employee is treated as having a reasonable opportunity to make or change an election if the election opportunity begins as soon as practicable after the date the updated notice is provided to the employee, but not later than 30 days after the date the change is adopted.

The Notice includes a number of helpful examples illustrating when a midyear change meets the applicable requirements.

Prohibited Midyear Changes

Under the Notice, a plan sponsor may not make the following midyear changes unless the change is required by applicable law (such as a change mandated by a statutory law change or court decision):

  • An increase in the number of years of service required for an employee to have a vested interest in employer safe harbor contributions under a “qualified automatic contribution arrangement” (QACA).
  • A reduction in the number, or otherwise narrowing of, the group of employees eligible to receive safe harbor contributions.
  • A change to the type of safe harbor plan, such as a change from a traditional 401(k) safe harbor plan to a QACA safe harbor plan.
  • An increase in the amount of matching contributions, or a change to permit discretionary matching contributions, unless the change is adopted at least three months prior to the end of the plan year, the updated safe harbor notice and election opportunity are provided and the change is made retroactively effective for the entire plan year.

Midyear Changes Addressed in Regulations

The guidance in the Notice does not apply to the following midyear changes, which are addressed in existing regulations and may be made only in accordance with those regulations:

  • Adoption of a short plan year or any change to the plan year
  • Adoption of safe harbor plan status on or after the beginning of the plan year
  • Reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status

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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