Internal Revenue Service Provides Temporary Relief and Other Guidance on Mid-Year Reductions of Safe Harbor Contributions to 401(k) Plans due to COVID-19
On June 29, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-52 that provides temporarily relief to plan sponsors that amend their safe harbor Section 401(k) or 401(m) plans (“Safe Harbor Plans”) mid-year to reduce or suspend employer safe harbor matching or nonelective contributions due to the COVID-19 pandemic. To qualify for the relief, a Safe Harbor Plan would need to be amended between March 13, 2020 and August 31, 2020.
Under current IRS regulations and related guidance, a Safe Harbor Plan may be amended mid-year to reduce or suspend the employer’s safe harbor matching or nonelective contributions only if all of the following requirements are met:
- The employer either (i) is operating under an economic loss for the year (which is generally a facts and circumstances test), or (ii) included a statement in the original safe harbor notice given to participants before the start of the plan year (“Original Notice”) that the employer may reduce or suspend contributions mid-year and that the reduction or suspension will not apply until at least 30 days after participants are provided notice of the reduction or suspension (“Required Reservation”).
- All eligible participants are provided with a supplemental notice that explains (i) the consequences of the amendment that reduces or suspends the future safe harbor contributions, (ii) the procedures for participants to change their cash or deferred elections, and (iii) the effective date of the amendment (“Supplemental Notice”);
- The reduction or suspension of safe harbor contributions is effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the Supplemental Notice;
- Participants must be given a reasonable opportunity (including a reasonable period after receipt of the Supplemental Notice) prior to the reduction or suspension of safe harbor contributions to change their 401(k) elections;
- The plan must be amended to provide that the ADP test and the ACP test (if applicable) will be satisfied for the entire plan year using the “current year testing method” (i.e., the plan can no longer use the safe harbor to satisfy such testing for the year); and
- The plan must make the pre-amendment safe harbor contributions through the effective date of the amendment.
Temporary Relief and Other Guidance Provided Under Notice 2020-52
Due to unprecedented circumstances resulting from the COVID-19 pandemic, Notice 2020-52 provides the following additional temporary relief from the general prohibition on mid-year reductions or suspensions of safe harbor contributions:
- For a plan amendment adopted between March 13, 2020 and August 31, 2020, a plan will not be treated as failing to satisfy the requirement that the employer either is operating under an economic loss for the year or included the Required Reservation in the Original Notice given to participants.
- For a plan amendment that reduces or suspends safe harbor nonelective contributions adopted between March 13, 2020 and August 31, 2020, the plan will not be treated as failing to satisfy the requirement that participants be provided the Supplemental Notice at least 30 days prior to the effective date of the reduction or suspension, so long as (i) the Supplemental Notice is provided to participants no later than August 31, 2020, and (ii) the plan amendment is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions. This relief does not apply to mid-year reductions or suspensions of safe harbor matching contributions.
- The temporary relief described above also will apply on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules to satisfy the nondiscrimination rules applicable to such plans.
Separately, Notice 2020-52 clarifies that, because contributions made on behalf of highly compensated employees (“HCEs”) are not included in the definition of safe harbor contributions, a mid-year change that reduces only the contributions of HCEs is not considered a suspension or reduction of safe harbor contributions that requires an employer to satisfy the rules described above. However, such a mid-year change would be a change to the content of plan’s Original Notice, and pursuant to prior guidance issued in IRS Notice 2016-16 an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.
Many employers have implemented or are considering changes to their 401(k) plan matching and nonelective contributions in light of the economic situation related to the COVID-19 pandemic. There are a number of considerations with any of these changes and employers should consider them carefully with counsel. IRS Notice 2020-52 provides welcome guidance in this regard for employers considering changes to Safe Harbor Plans.