The Internal Revenue Service (IRS) issued helpful guidance to plan sponsors of safe harbor 401(k) plans that are considering reducing or suspending safe harbor employer matching contributions or safe harbor nonelective contributions as a result of the COVID-19 pandemic. As explained below, IRS Notice 2020-52 provides temporary relief from certain requirements that would otherwise apply for making mid-year amendments to safe harbor 401(k) plans.
A safe harbor plan requires an employer to make a minimum level of matching or nonelective employer contributions, and satisfy other requirements, including minimum vesting, annual notice, and mid-year amendment restrictions, for the plan year to avoid nondiscrimination testing. Generally, an employer is permitted to amend the plan mid-year to reduce or suspend safe harbor contributions only if (1) the employer is operating at an economic loss (as defined by the IRS) or (2) the employer included in the plan’s annual safe harbor notice a statement that contributions may be reduced or suspended during the plan year with at least 30 days’ notice. In the event of such a mid-year reduction or suspension of safe harbor contributions, the plan must be amended to provide that traditional nondiscrimination testing will be administered. In addition, if a change to a plan affects the content of a prior safe harbor notice, an updated notice must be provided so participants may evaluate making changes to their plan elections.
TEMPORARY RELIEF TO SUSPEND OR REDUCE CONTRIBUTIONS MID-YEAR
In Notice 2020-52, the IRS noted that, during the ongoing COVID-19 pandemic, many employers are facing unprecedented financial challenges and may need to reduce or suspend contributions to their safe harbor plans in order to satisfy payroll and other operating costs. The IRS recognized that employers may be uncertain as to whether it is operating at an economic loss for the plan year and, due to the unexpected nature of the COVID-19 pandemic, may not have foreseen the need to include a statement in the plan’s safe harbor notice that safe harbor contributions may be reduced mid-year. Further, in light of the COVID-19 pandemic, the IRS noted that employers may have difficulty satisfying the timing requirements for providing the supplemental notice of reductions or suspension of safe harbor contributions.
To address these issues, Notice 2020-52 provides temporary relief from certain requirements that would apply to mid-year contribution changes. Under the relief set forth in the Notice, a plan sponsor may adopt an amendment between March 13, 2020 and August 31, 2020 to prospectively reduce or suspend safe harbor matching or safe harbor nonelective contributions regardless of whether the employer is operating at an economic loss or included a reduction of contribution statement in the plan’s safe harbor notice.
It is important to note that, while other COVID-19 guidance has allowed plans to make administrative changes now while delaying the adoption of formal written plan amendments, a change pursuant to Notice 2020-52 must be made pursuant to an amendment that is adopted before the change takes effect and between March 13, 2020 and August 31, 2020.
Notice 2020-52 also provides temporary relief to the 30-day advance notice requirement for reductions or suspensions of safe harbor nonelective contributions, as long as the updated safe harbor notice is provided no later than August 31, 2020 and the plan amendment is adopted no later than the effective date of the reduction or suspension. There is no relief for the 30-day advance notice requirement for mid-year reductions or suspensions of safe harbor matching contributions because matching contribution levels communicated to employees directly affect employee decisions on whether to make elective deferrals.
This temporary relief is also available to Section 403(b) plans that apply the Section 401(m) safe harbor rules to satisfy the nondiscrimination rules applicable to such plans.
AMENDMENTS APPLICABLE TO HIGHLY COMPENSATED EMPLOYEES
Notice 2020-52 clarifies that a mid-year amendment that reduces contributions for only highly compensated employees (HCEs) is not a reduction or suspension of safe harbor contributions and does not impact safe harbor status. This is because the 401(k) safe harbor regulations only require that safe harbor contributions be provided to non-highly compensated employees (NHCEs) and technically, contributions made on behalf of HCEs are not safe harbor contributions. However, such an amendment is a mid-year change to the plan’s safe harbor notice content requirements for purposes of IRS Notice 2016-16 and an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.
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