IRS provides guidance on midyear changes to contributions to 401(k) safe harbor plans

The notice is in response to requests from the retirement plan industry that the requirements relating to midyear reductions or suspensions of safe harbor contributions be loosened, especially relating to safe harbor notice requirements. Such relief was crucial for employers that were struggling to meet payroll expenses and operating costs due to the sudden shutdown or interruption of normal business activity.  

Generally, 401(k) plans must comply with certain requirements to ensure they do not discriminate in favor of HCEs or other key employees. The law permits employers to circumvent some of these requirements if they follow the rules for a 401(k) safe harbor plan. These rules generally require an employer to make safe harbor contributions for the entire plan year in the form of a match based on eligible non-highly compensated employees’ (NHCEs) salary deferrals or in the form of nonelective contributions based on eligible NHCEs’ pay. They also generally require that an employer satisfy annual notice requirements—although the Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated the annual notice requirement for safe harbor nonelective plans.  

Further, there are strict regulations that limit the circumstances under which an employer may reduce or suspend safe harbor contributions midyear (i.e., the employer must be operating at an economic loss or must have provided “maybe not” language in the annual notice warning participants of the possibility of a reduction or suspension). These regulations also control the timing and provide that any reduction or suspension may occur no earlier than 30 days after a supplemental notice is provided or, if later, the date the amendment is adopted.

The notice clarifies that “contributions made on behalf of HCEs are not included in the definition of safe harbor contributions.” Accordingly, an employer may reduce or suspend contributions on behalf of HCEs and still maintain the plan’s safe harbor status; however, since this change affects the safe harbor notice, an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the midyear change applies, in accordance with rules for permissible midyear changes to safe harbor plans (under IRS Notice 2016-16). Surprisingly, it appears that NHCEs are not required to receive the updated safe harbor notice in this case.

Relief for reductions or suspensions of safe harbor matching or nonelective contributions: A midyear amendment may be adopted between March 13, 2020, and August 31, 2020, to reduce or suspend safe harbor contributions (matching or nonelective), regardless of whether the employer is operating at an economic loss or whether the 2020 safe harbor notice contained “maybe not” language; however, any such amendment cannot be effective before the date it is adopted (or, for plans with safe harbor matching contributions, 30 days after a supplemental safe harbor notice is issued, if later). The 30-day advanced notice is retained for the reduction or suspension of safe harbor matching contributions (as opposed to nonelective contributions), since this directly influences an employee’s deferral election.

Additional relief for reductions or suspensions solely of nonelective contributions: If a midyear amendment to suspend or reduce safe harbor nonelective contributions is adopted between March 13, 2020, and August 31, 2020, the requirement to provide a supplemental safe harbor notice 30 days in advance is deemed to be met if the supplemental safe harbor notice is provided no later than August 31, 2020. 

The notice is welcome relief for employers faced with financial challenges, although it does add some confusion. For example, the notice does not address how the elimination of the annual notice requirement for safe harbor nonelective plans (as permitted under the SECURE Act) will apply in the event of a reduction or suspension of safe harbor nonelective contributions. This leaves employers in a dilemma as to implications for 2021 safe harbor notices, especially since the deadline is rapidly approaching. Additionally, the notice implies (at least it does not implicitly state otherwise) that, unless an employer is operating at an economic loss, “maybe not” language is required in the annual safe harbor notice to retain the right to reduce or suspend safe harbor contributions—even for safe harbor nonelective plans. This raises the question of how employers will provide “maybe not” language if they do not provide an annual safe harbor notice.  

Hopefully, the IRS will provide guidance addressing these outstanding issues. Until then, employers should act in good faith and consider whether a 2021 safe harbor notice is warranted—at least for now.