ARA Recommends Expanding Safe Harbor Amendments Guidance

In a June 8 letter to Rob Choi, director of the Office of Employee Plans in the IRS Tax-Exempt & Government Entities Division, the American Retirement Association offered comments on the guidance contained in IRS Notice 2016-16 concerning mid-year amendments to safe harbor 401(k) and 403(b) plans.

The IRS on Jan. 29, 2016 issued Notice 2016-16, which contains 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 ARA recommends expanding the guidance contained in IRS Notice 2016-16 in the following ways.

Clarify that if an employer amends a safe harbor plan mid-year to include employees acquired in an Internal Revenue Code Section 410(b)(6)(c) transaction, the newly eligible group will be treated as covered by the safe harbor provisions of the plan, even if the amendment was adopted within the last three months of the plan year, and specifically that the relief from ADP and ACP test (as applicable) would apply to the plan and all participants, and the newly eligible group would not cause the plan to be treated as failing to qualify for the exemption from the top heavy rules under Code Section 416(g)(4)(H).

The ARA notes that Section III.D.4 of the notice prohibits increasing or adding a formula for “matching contributions” unless such change is made at least three months before the close of the plan year and that change is retroactive to the beginning of the plan year. The ARA does not believe that the intention of this wording was to affect any other contribution sources. The ARA recommends that in order to avoid any confusion, the IRS clarify that the plan can be amended to increase non-safe harbor contributions, other than matching contributions, at any time during the year.

The ARA suggests that the IRS provide that the restrictions in Section III.D.4 of the notice apply only to the safe harbor matching contributions and not to other matching contributions subject to non-discrimination testing. It recommends that the IRS limit the application of those restrictions to only matching contributions that are intended to meet the safe harbor provisions of Code Sections 401(m)(11) and (12).

The ARA recommends that the IRS allow a plan to make eligibility less restrictive, via an amendment, at any time during the year. It suggests that the RIS add additional examples to clearly illustrate eligibility may be expanded.

The ARA further recommends the IRS clarify that if an employer amends a safe harbor plan mid-year to expand eligibility, then the newly eligible group will be treated as covered by the safe harbor provisions of the plan. Specifically, that the relief from the ADP and ACP test (as applicable) would apply to the plan and all participants, and the newly eligible group would not cause the plan to be treated as failing to qualify for the exemption from the top heavy rules under IRC section 416(g)(4)(H).

The ARA suggests that the IRS allow alternative notices to be given to participants under section III.C of the notice. More specifically, the IRS recommends that the IRS amend section III.C.1 to require:

1. An amended safe harbor notice; or

2. If the provisions that have changed were incorporated by reference to the summary plan description, an updated SPD or summary of material modifications; or

3. Any other notice that advises the participant:

  • of the effect of the amendment;
  • when the amendment is effective; and
  • how the amendment changes the information communicated in the safe harbor notice.

The ARA suggested that the IRS add to section III.D.3 of the notice the phrase: “or changing a safe harbor non-elective plan into a safe harbor matching plan.”

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>