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IRS Issues Guidance on Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices

The IRS on Jan. 29 issued guidance on mid-year changes to a safe harbor plan under Internal Revenue Code Sections 401(k) and 401(m). It provides that a mid-year change either to a safe harbor plan or to a plan's safe harbor notice does not violate the safe harbor rules just because it is a mid-year change — as long as applicable notice and election opportunity conditions are satisfied and the mid-year change is not a prohibited mid-year change. The guidance is contained in Notice 2016-6, which will appear in Internal Revenue Bulletin 2016-07 on Feb. 16, 2016.

The notice:


  • provides guidance on mid-year changes to a safe harbor plan or to a plan’s required safe harbor notice content that do not violate the safe harbor plan rules in Treas. Reg. §§1.401(k)-3 and 1.401(m)-3;



  • sets out special conditions that must be satisfied for a mid-year change that alters the plan’s required safe harbor notice content;



  • lists prohibited mid-year changes; and



  • provides examples illustrating certain aspects of the guidance provided under this notice.


For purposes of the notice:

A safe harbor plan is a traditional 401(k) safe harbor, a qualified automatic contribution arrangement (QACA), a traditional matching safe harbor or a QACA matching safe harbor.

A “mid-year change” is:


  • a change that is first effective during a plan year, but not effective as of the beginning of the plan year; or



  • a change that is effective as of the beginning of the plan year, but adopted after the beginning of the plan year.


Required safe harbor notice content refers to the information that is required by the safe harbor plan regulations to be provided in a plan’s safe harbor notice.

Provisions

The notice says that a change made to a safe harbor plan or to a plan’s required safe harbor notice content does not violate Treas. Reg. §§1.401(k)-3 and 1.401(m)-3 just because the change is a mid-year change, as long as:


  • it is a mid-year change to a plan’s required safe harbor notice content, the notice and election opportunity conditions in section III.C of this notice are satisfied, and



  • the mid-year change is not described in the list of prohibited mid-year changes in section III.D of this notice.


The following mid-year changes are not subject to the notice, but instead would violate the requirements of Treas. Reg. §§1.401(k)-3 and 1.401(m)-3 unless the applicable regulatory conditions corresponding to each specified change are satisfied:

  • adoption of a short plan year or any change to the plan year (permitted only as described in Treas. Reg. §§1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)(2), (3), and (4));



  • adoption of safe harbor plan status on or after the beginning of the plan year (permitted only as described in Treas. Reg. §§1.401(k)-3(f) and 1.401(m)-3(g)); and



  • reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status (permitted only as described in Treas. Reg. §§1.401(k)-3(g) and 1.401(m)-3(h)).


Other applicable law also may affect the permissibility of mid-year changes, including, for example, Treas. Reg. §411(d)(6) (anti-cutback restrictions), Treas. Reg. §401(a)(4) (nondiscrimination restrictions), and Treas. Reg. §1.401(k)-1(b)(3) (anti-abuse provisions).

The notice does not require any additional notice or election opportunities for changes to information that is not required safe harbor notice content, even if that information is provided in a plan’s safe harbor notice. It also does not modify the rules governing information required to be included in a plan’s safe harbor notice.

The notice provides that an updated safe harbor notice that describes the mid-year change and its effective date must be provided to each employee otherwise required to be provided a safe harbor notice under Treas. Reg. §§1.401(k)-3(d), 1.401(k)-3(k)(4), or 1.401(m)-3(e), as applicable, within a reasonable period before the effective date of the change.

The notice also says that each employee it requires be provided an updated safe harbor notice must be given a reasonable opportunity (including a reasonable period after receipt of the updated notice) before the effective date of the mid-year change to change his or her cash or deferred election (and/or any after-tax employee contribution election).

Prohibited Mid-Year Changes

Mid-year changes the notice prohibits include:


  • a mid-year change to increase the number of completed years of service required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a QACA;



  • a mid-year change to reduce the number, or otherwise narrow the group, of employees eligible to receive safe harbor contributions;



  • a mid-year change to the type of safe harbor plan; and



  • a mid-year change to modify (or add) a formula used to determine matching contributions if the change increases the amount of matching contributions, or to permit discretionary matching contributions.


Effective Date

This notice is effective for mid-year changes made on and after Jan. 29, 2016.

Comments Welcome

The IRS has requested comments on additional guidance that may be needed regarding mid-year changes to safe harbor plans, as well as whether additional guidance is needed to address mid-year changes relating to plan sponsors involved in mergers and acquisitions or to plans that include an eligible automatic contribution arrangement. Comments may be submitted in writing no later than April 28, 2016.

Comments should be submitted to:

Internal Revenue Service
CC:PA:LPD:PR (Notice 2016-16)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

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