IRS Allows Mid-year Changes to Safe Harbor Plans (article)
In 2006, the law was amended to provide for a safe harbor retirement plan. In a nutshell, a safe harbor retirement plan that meets certain conditions is exempt from discrimination rules such as the actual contribution percent (ACP) test and actual deferral percent (ADP) tests; and in some circumstances, the top heavy rules. One of the outstanding questions over the years has been, can a safe harbor plan be changed mid-year?
The IRS recently issued guidance (Notice 2016-16) providing that certain changes can be made mid-year without jeopardizing safe harbor status of the plan. These rules apply to traditional safe harbor plans, as well as qualified automatic contribution arrangements and 403(b) plans.
The Notice includes several types of examples of permissible mid-year changes. The types of amendments that can occur mid-year include a change in a non-elective deferral percentage, the addition of the age 59½ withdrawal provision, or a modification to the default investment.
There are certain changes that cannot be made mid-year, such as:
- A mid-year change to increase the number of completed years of service required for an employee’s right to his/her account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement;
- 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; or
- A mid-year change to modify the formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the change increases the amount of matching contributions, or to permit discretionary matching contributions.
Safe Harbor Notice Requirements
Safe harbor plans are required to provide periodic participant notifications. According to the IRS guidance, if a mid-year change by the plan would alter information contained in the existing safe harbor notice, participants must be given notice of the mid-year change, reasonably in advance of its effective date. Generally, a notification is deemed ‘reasonably in advance’ if it occurs between 30 and 90 days prior to the effective date of the change. Further, if the mid-year change alters a change in contribution, then individuals must be given a reasonable opportunity (30 days is deemed reasonable) to make any election changes.
This is welcome guidance to employers sponsoring safe harbor plans. The IRS will likely provide additional guidance in the future. In particular, the IRS has asked for comments on whether any guidance is needed, for example, in the event of business reorganizations such as a merger.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.