Relief regarding mid-year amendments to safe harbor 401(k) plans arrived earlier this year with IRS notice 2016-16. The notice provided a short list of prohibited mid-year changes leaving all other mid-year changes available.
This IRS guidance helps plan sponsors comply with safe harbor plan and notice rules when making a mid-year change if:
- The appropriate notice and election opportunity are provided, typically between 30-90 days.
- The mid-year change is not a prohibited change.
Permissible Mid-Year Safe Harbor 401(k) Plan Changes Include
- Increasing future safe harbor non-elective contributions from 3% to 4% for all eligible employees.
- Adding an age 59 ½ in-service withdrawal feature.
- Changing the plan’s default investment fund.
- Altering the plan rules on arbitration of disputes.
- Shifting the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly.
- Adopting mid-year amendments required by applicable law (for example, statutory law changes or court decisions).
Prohibited Mid-Year Safe Harbor 401(k) Plan Changes Include
- Increasing an employee’s required number of completed years of service to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA).
- Reducing the number of employees eligible to receive safe harbor contributions.
- Changing the type of safe harbor plan, for example, from a traditional safe harbor plan to a QACA 401(k) safe harbor plan.
- Modifying a formula for determining matching contributions if the change increases the amount of matching contributions, or permit discretionary matching contributions. A plan isn’t limited if the:
- change is adopted at least 3 months before the end of the plan year,
- change is made retroactive for the entire plan year, and
- plan sponsor gives an updated safe harbor notice and election opportunities at least 3 months prior to the end of the plan year.
As always your local ABG representative is available to help you with mid-year plan changes and as a resource for any questions you may have.