The IRS has released Notice 2016-16 which allows employers to adopt mid-year amendments to safe harbor 401(k) and 403(b) plans. It includes traditional safe harbor plans and QACAs. The new rule eliminates much of the uncertainty which has plagued this popular plan design for years.
In general, the Notice permits almost all “mid-year changes,” defined as a change that is either:
· Effective on a day other that the first day of a plan year, or
· A change effective on the first day of a plan year but adopted after the beginning of the year.
Because of the way the IRS defined a mid-year change, the Notice allows changes an employer adopts during the plan year, as well as retroactive corrective amendments adopted after the end of a year.
The new rule applies both to amendments to the plan itself and to other changes “required safe harbor notice content,” information which the regulations require to appear in the safe harbor notice. For example, it addresses:
· Plan amendments to add a distribution option,
· Changes to contact information which the regulations require to be part of the safe harbor notice, and
· Changes to default investments, which the regulations require to be part of a QACA notice.
In short, the Notice permits mid-year changes with very few exceptions. Instead of saying “You can do this and this and this,” the Notice says “You can do what you want except for that and that and that.” This is a marked and very welcome change from the IRS.
Updated notice and change of election
If the mid-year change would affect required safe harbor notice content, then:
· The plan must provide all participants required to receive a safe harbor notice with an updated safe harbor notice which describes the mid-year change and its effective date;
· The participants must have a reasonable opportunity after receipt of the updated notice to change their deferral elections.
The updated notice must generally be given a reasonable time before it goes into effect. A notice given 30 – 90 days before the effective date is deemed reasonable. If that is impractical (such as for a retroactive change to the beginning of the plan year), then a notice provided as soon as practical (and not later than 30 days) after adoption is deemed reasonable.
Most 401(k) plans allow participants to change their deferral elections at any time. For those plans the requirement to have an opportunity to change deferral elections should not be an issue. But for plans with more limited deferral change features, a 30 day period (before the effective date if practical (or after receipt of the notice if not) is reasonable.
Prohibited mid-year changes and special rules
The Notice provides that a few mid-year changes are not permitted:
· A change from a traditional safe harbor to a QACA, or vice versa; however the addition of an automatic enrollment feature to a traditional safe harbor plan is permitted;
· A change lengthening the vesting schedule for QACA safe harbor contributions; or
· A change reducing the number or otherwise narrowing group of employees eligible to receive safe harbor contributions. However, this does not limit the ability of the employer to amend a plan mid-year to change eligibility requirements for employees who have not yet become eligible to receive safe harbor contributions.
Special rules apply if the employer wishes to:
· Add a new fixed match to a plan,
· Increase a fixed match to a plan,
· Add a new discretionary match to a plan, or
· Change the definition of compensation used to compute matching contributions (if it would have the effect of increasing the match).
In that case, both of the following conditions must be satisfied:
· The plan must follow the rules above for an updated safe harbor notice and change in deferral elections. The updated notice must be given at least 3 months before the end of the plan year.
· The change must be retroactively effective for the entire year. If the plan calculates the match on a periodic basis, the retroactive effective date may require that the employer retroactively amend the plan to calculate the match on a full plan year basis, with true-up.
There are several mid-year changes already addressed in the regulations, which have their own regulatory requirements and limitations. The Notice does not apply to these changes, which remain subject to their specific regulatory requirements:
· Mid-year adoption of a new safe harbor plan;
· Adoption of a short plan year or a mid-year change in the plan year;
· Mid-year reduction or suspension of safe harbor contributions (exiting);
· Mid-year plan termination; or
· Use of the maybe notice to change to safe harbor status.
The Notice reminds that other rules, such as the anti-cutback rule, could impact the ability to make mid-year changes.
We will discussed this new development in great details in the session “Midyear Safe Harbor Amendments” presented by Craig Hoffman at the Orlando Advanced Pension Conference on February 10-12, 2016. See below for details.
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Orlando Advanced Pension Conference – Feb. 10-12 – Seats are still available
See program highlights, agenda, event details, and register online, here:
http://www.relius.net/Events/seminardetail.aspx?CID=26749
Just for ERPAs Workshop, Orlando FL – February 9, 2016
View event details and register online, here:
http://www.relius.net/Events/seminardetail.aspx?EID=26867
Pensions on Peachtree, Atlanta, GA – April 25-26 – Registration is now open!
The professional educators at FIS are joining forces with the Ferenczy Benefits Law Center, LLP, based in Atlanta and Knoxville, to bring you their third annual conference. Program details and online registration is now available, here.
Live Web Seminars – 7 more just added!
401(k) Testing Techniques, 2/2, 12:00 PM ET
Documenting Hardships Distributions and Participant Loans, 2/3, 12:00 PM ET
Fundamentals Series 02: Vesting, 2/4, 12:00 PM ET
457(b) Plans for 401(k) Practitioners, 2/16, 12:00 PM ET
Safe Harbor Midyear Amendments: Yes You Can!, 2/17, 12:00 PM ET
Fundamental Series 03: Compensation and HCEs, 2/18, 12:00 PM ET
DC Plan Restatement FAQs, 2/24, 12:00 PM ET
Multiple Employer Plans: How MEPs Work for Private Employers, 3/1, 12:00 PM ET
Fundamentals 04: Coverage Test, 3/3, 12:00 PM ET
MEPs, IRAs, and More: DOL Guidance on State Plans, 3/8, 12:00 PM ET
Fundamentals 05: Elective Deferrals, 3/10, 12:00 PM ET
Church Plans: The Retirement Benefits Are Better Than Ever, 3/15, 12:00 PM ET
Fundamental 06: ADP/ACP Test, 3/17, 12:00 PM ET
Practical Corrections Series 01: Elective Deferral Failures, 3/29, 12:00 PM ET
Fundamentals Series 07: Safe Harbor 401(k) Plans, 3/31, 12:00 PM ET
Practical Corrections 02: Plan Document Failures, 4/5, 12:00 PM ET
For more details about these programs, and to register online: www.relius.net/events/events.aspx?Web
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