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July 02, 2020

IRS Releases COVID-19 Relief and Other Guidance on Mid-Year Changes to Safe Harbor Plans

On Monday, June 29, 2020, the Internal Revenue Service (IRS) issued Notice 2020-52 (Notice) that provides limited relief to certain mid-year amendment restrictions and notice requirements for safe harbor plans.
 
Current Safe Harbor Plan Rules
 
Contributions to a 401(k) plan must not discriminate in favor of highly compensated employees (HCEs). The nondiscrimination rules may be met through a safe harbor plan design that includes limits on mid-year changes and a requirement to provide notice to plan participants.
 
Under the Treasury Regulations and existing IRS guidance, a mid-year amendment to a safe harbor plan to reduce or suspend safe harbor matching or nonelective contributions is permitted only if (1) the employer is operating at an economic loss (as defined in the Internal Revenue Code) for the plan year or (2) the safe harbor notice for the plan year includes a statement that the plan’s safe harbor contributions may be reduced or suspended during the plan year. In either situation, the employer must provide a supplemental notice about the reduction or suspension to all participants at least 30 days in advance of the change. Also, for the year of the change, the plan must satisfy the general nondiscrimination rules – the actual deferral percentage (ADP) test for election deferrals (including Roth contributions) and the actual contribution percentage (ACP) test for matching contributions and after-tax employee contributions – on a current year testing basis.
 
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) eliminated the annual safe harbor notice requirements for plans with safe harbor nonelective contributions, effective for plan years beginning after December 31, 2019. Annual safe harbor notices are still required for plans with safe harbor matching contributions.
 
Relief for Safe Harbor Plans
 
Due to the economic disruption caused by the ongoing COVID-19 pandemic, many employers are facing unexpected financial challenges. As a result, employers may need to reduce or suspend contributions to their safe harbor plans to satisfy payroll and other operating costs. Some employers may be considering a reduction in safe harbor plan contributions made to (1) just HCEs or (2) all participants, both HCEs and non-HCEs.
 
Many employers may be uncertain whether they will be operating at an economic loss for the 2020 plan year at the time the mid-year amendment to reduce/suspend safe harbor contributions is adopted, and due to the unexpected nature of the COVID‑19 pandemic, employers were not able to foresee the need to include a statement in their plan’s 2020 safe harbor notice that safe harbor contributions may be reduced or suspended mid‑year.
 
The Notice provides temporary relief with respect to the amendment restrictions and notice requirements that apply to a mid-year reduction or suspension of safe harbor contributions.
 
Reducing Safe Harbor Contributions to HCEs
 
The Notice clarifies that contributions made to HCEs are not included in the definition of safe harbor contributions. This means a mid-year change that reduces or eliminates contributions made only to HCEs is not a reduction or suspension of safe harbor contributions. This clarification applies to the safe harbor rules in general and, while unrelated to the COVID-19 pandemic, it may be helpful to employers now.
 
A mid-year change to reduce contributions to HCEs, however, is a mid-year change to the plan’s required annual safe harbor notice content. As a result, when a safe harbor plan is amended mid‑year to reduce or eliminate contributions to HCEs, an updated safe harbor notice must be provided to all affected HCEs, determined as of the date of the issuance of the updated safe harbor notice, and those HCEs must be given an opportunity to change their deferral elections.
 
The footnote to this section of the Notice states the Notice does not address the SECURE Act elimination of the annual safe harbor notice requirements for safe harbor plans with nonelective contributions. So, it is unclear whether an updated safe harbor notice is needed when nonelective contributions to HCEs are reduced or eliminated mid-year. But the Notice makes it clear that an updated safe harbor notice is still required when matching contributions to HCEs are reduced or eliminated mid-year.
 
Temporary Relief for Mid-Year Reductions or Suspensions of Safe Harbor Contributions
 
If an amendment to reduce or suspend safe harbor matching or nonelective contributions is adopted between March 13, 2020 (the beginning of the COVID-19 national emergency declaration) and August 31, 2020 (Amendment Period), then, under the Notice, the plan will not have to prove it was operating at an economic loss for 2020 or that the plan’s 2020 annual safe harbor notice included a statement indicating safe harbor contributions may be reduced or suspended mid-year.
 
If a safe harbor plan is amended as permitted under the Notice, the plan must pass the ADP and ACP (if applicable) tests for the plan year using the current year testing method.
 
Temporary Relief for Supplemental Notice of Mid-Year Reductions or Suspensions of Safe Harbor Nonelective Contributions (but NOT Safe Harbor Matching Contributions)
 
Nonelective Contributions. If safe harbor nonelective contributions are reduced or suspended during the Amendment Period, the Notice specifies that the plan will satisfy the 30‑day advance supplemental notice requirement if:
 
  • The supplemental notice is provided to participants no later than August 31, 2020; and
  • The plan amendment is adopted no later than the effective date of the reduction or suspension.
 
Matching Contributions. The Notice does not give relief from the 30-day advance supplemental notice requirement for a reduction or suspension of safe harbor matching contributions adopted during the Amendment Period. According to the Notice, this is because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions. Consequently, if an employer reduces or suspends safe harbor matching contributions during the Amendment Period, the supplemental notice must be provided at least 30 days before the effective date of the amendment.
 
403(b) Plans
 
The relief provided under the Notice also applies to 403(b) plans.
 
Implications for Employers
 
The Notice is retroactively effective, so employers that amended their plans to reduce or suspend safe harbor contributions before the Notice was issued may qualify for the relief offered by the Notice. An employer that already amended its safe harbor plan needs to confirm the amendment conforms to the requirements of the Notice, including the supplemental notice requirement.  
 
Employers who wish to reduce or suspend safe harbor contributions but have held off because they did not meet the mid-year amendment requirements need to:
 
  • Adopt the amendment by August 31, 2020; and
  • Provide the supplemental notice to participants:
    • By August 31, 2020, for amendments reducing or eliminating nonelective safe harbor contributions; or
    • At least 30 days before the amendment is effective for safe harbor matching contributions.
 
For More Information on COVID-19 Compliance
 
Warner is here to help! Visit Warner’s COVID-19 Resource Center for the latest insight into COVID‑19 developments.
 
If you are considering reducing or suspending your plan’s safe harbor matching or nonelective contributions or need assistance with implementing the CARES Act retirement plan provisions, please contact Lisa Zimmer, Brianna Richardson, or a member of Warner’s Employee Benefits and Executive Compensation Practice Group.
 

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