Safe Harbor Mid-Year Amendments

by: Michael Marx

The IRS has recently announced a reasonable and workable procedure for mid-year amendments to safe harbor plans.

As you probably know, safe harbor 401(k) plan utilize prescribed levels of matching contributions or non-elective (profit sharing) contributions. The plan designs permit highly compensated employees to defer the maximum permitted each year by the IRS (The Service) without any limitations resulting from discrimination testing.

On December 29, 2004, the Service issued final regulations that were generally effective for plan years beginning on or after January 1, 2006. These regulations expanded the requirements for safe harbor notices beyond the statutory mandates of Code Section 401 (k)(12)(D). Based on these stricter requirements, the Service stated that mid-year amendments were not permitted on the notion that the safe harbor notice applied to a full plan year precluding any amendments.

This position created confusion for practitioners and plan sponsors. Thereafter, practitioners were not sure which-if any- mid-year amendments were permitted without losing safe harbor status. The Service issued Announcement 2007-59 providing limited guidance. It states that adding Roth and the new hardship distributions would be permissible mid-year amendments. The Service also requested comments to find out if further guidance would be required.

Our industry responded to the request for comments with letters and discussions in public forums and seminars. Fortunately, the Service took these comments into consideration in crafting Notice 2016-16. The guidance provides a reasonable framework for the Service, for practitioners and plan sponsors.

Essentially, safe harbor plans can be amended so long as participants are given updated safe harbor notices at least 30 days (and not more than 90 days) prior to the effective date of the change. Employees must also be given a reasonable opportunity before the effective date of the change to modify elective deferrals.