Mid-year changes to a Safe Harbor 401k plan were risky prior to the recently issued IRS Notice 2016-16. It was as if a Safe Harbor plan was on lockdown once the year started – plan sponsors would be stuck with the provisions outlined in the plan document for the full year. So this new guidance from IRS is welcome news!
WHEN IS THE NEW REGULATION EFFECTIVE?
The Notice is effective for mid-year changes made on or after January 29, 2016.
WHICH PLANS ARE IMPACTED BY THE NEW RULES?
There are three types of plans that are impacted by these new rules:
- 401(k) plans that have adopted either traditional Safe Harbor match or non-elective Safe Harbor provisions
- 401(k) plans that have adopted Qualified Automatic Contribution Arrangement (QACA) matching Safe Harbor
- 403(b) plans that have adopted Safe Harbor provisions
ARE THERE RESTRICTIONS TO THE TYPE OF CHANGES ALLOWED MID-YEAR?
Yes, there are restrictions on the types of changes that may be adopted mid-year to a Safe Harbor plan. The following changes are examples of those that would violate the rules:
- Adoption of a short plan year, or any change to the plan year
- Adding Safe Harbor provisions after the beginning of the plan year
- Reduction or suspension of Safe Harbor contributions including any change to eliminate Safe Harbor provisions
- A change that would increase the years of service to be vested in QACA Safe Harbor contributions
- Reducing the number of employees eligible to receive Safe Harbor contributions
- A change in the type of Safe Harbor plan; g., change from traditional Safe Harbor 401(k) to QACA 401(k)
- Modification of the formula used to determine matching contributions within the last three months of the plan year
WHAT CHANGES ARE ALLOWED UNDER THE NEW RULES?
Innocuous changes such as plan name changes, and plan trustee changes, or adding optional withdrawal provisions such as loans or hardships may now be made to Safe Harbor plans mid-year. In addition, the Notice provides specific examples of other changes that may be made.
- Increase the future Safe harbor non-elective contributions for all eligible employees
- Increasing the Safe Harbor matching contribution retroactive to the beginning of the plan year (and adopted three months or more before the end of the plan year)
- Changing the contributions from being calculated each pay period to the full plan year
- Adding an in-service withdrawal provision upon attainment of age 59 ½
- Changing the plan’s default investment in a QACA Safe Harbor plan
- Add automatic enrollment to an existing Safe Harbor plan with no change to the Safe Harbor formula
- Changing the entry date for commencement of participation for employees who were not already eligible to participate
DOES A NEW SAFE HARBOR NOTICE HAVE TO BE DELIVERED?
Yes, if the information in the Safe Harbor notice changes in any way due to an amendment to the plan, then a new notice must be delivered to employees. Safe Harbor notices must include the following information at a minimum:
- The plan’s Safe Harbor contributions and any other plan contributions
- The compensation used to determine contributions
- Administrative procedures for making contribution elections or changes
- The withdrawal and vesting provisions for the plan
- Contact information for the person who can respond to participant questions
WHAT ARE THE NOTICE DELIVERY REQUIREMENTS?
The Safe Harbor notice must generally be provided to give a reasonable opportunity for employees to make or change a contribution election before the change takes effect. The period of time that is deemed to be reasonable is at least 30-days before the effective date of the change. If the Notice can’t be provided before the effective date of the change, it should be provided as soon as possible, but not later than 30 days after the change is adopted.
This is welcome relief from the IRS for those who sponsor Safe Harbor plans. The plans are no longer in lock-down from any change, and while there are some restrictions imposed the fact that many changes may be adopted without consequence is great news.
If you have a question about your Safe Harbor 401k plan, any other retirement plan or are wondering if Safe Harbor options may benefit you, just click here to schedule a consultation with one of our pension consultants.
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