Long-awaited relief regarding midyear amendments to safe harbor 401(k) plans arrived when the IRS released Notice 2016-16 on January 29, 2016. The new rules were immediately effective and apply to both 401(k) and 403(b) traditional safe harbor plans and qualified automatic contribution arrangement (QACA) safe harbor plans.
Scope of the New Rule
Rather than the very short list of permitted midyear changes that we had before the guidance, we now have a short list of what are prohibited midyear changes, leaving all other midyear changes now available. Notice 2016-16 generally defines a “midyear change” as — (i) a change that is first effective during a plan year but not effective as of the beginning of the plan year, or (ii) a change that is effective as of the beginning of the plan year but adopted after the beginning of the plan year.
The Notice further provides that a midyear change to either a safe harbor plan or to a plan’s safe harbor notice won’t violate the safe harbor rules merely because it is a midyear change, provided that (1) if the change to the plan affects anything in the plan’s required safe harbor notice content, the applicable notice and election opportunity conditions are satisfied, and (2) the midyear change is not a prohibited midyear change.
Notice and Election Opportunity Conditions
Midyear changes affecting anything in the safe harbor notice require that participants receive an updated safe harbor notice. The updated safe harbor notice must describe the midyear change and its effective date. Timing requirements will generally be deemed satisfied if the notice is given to participants at least 30 days and not more than 90 days ahead of the change. If it is not practicable to provide the notice before the effective date of the change, such as for amendments retroactive to the beginning of the plan year, the notice is treated as timely provided it is given no later than 30 days after the change is adopted.
Whenever an updated safe harbor notice is provided, participants must have a reasonable opportunity to update their deferral and after-tax contribution elections before the effective date of the change. Notice 2016-16 deems a 30-day election period as a reasonable allowance to make a deferral change.
Prohibited Midyear Changes
Notice 2016-16 also provides IRS prohibited midyear changes, including those that:
- Violate the anti-cutback, anti-abuse, or nondiscrimination rules.
- Increase the number of years of vesting service required for vesting in QACA safe harbor contributions.
- Reduce the number or otherwise narrow the group of employees eligible for safe harbor contributions.
- Change the type of safe harbor arrangement — e.g., from a traditional to a QACA safe harbor.
- Increase a safe harbor benefit by modifying (or adding) a formula used to determine matching contributions (including the definition of “compensation” that is used to determine matching contributions) or permitting a discretionary matching contribution. However, this prohibition will not apply if, at least three months prior to the end of the plan year, the change is adopted, the updated safe harbor notice and election opportunity are provided, and the change is made retroactively effective for the entire year.