By Pension and Benefits Editorial Staff
The IRS has issued guidance, in the form of questions and answers, addressing safe harbor plan changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act, P.L. 116-94). These include an increase from 10% to 15% of the maximum automatic elective deferral for automatic enrollment safe harbor plans, and the elimination of notice requirements for certain safe harbor plans.
The IRS notes that the guidance applies on similar terms to Code Sec. 403(b) plans that apply the Code Sec. 401(m) safe harbor rules pursuant to Code Sec. 403(b)(12).
Changes for certain notice requirements. Code Secs. 401(k) and 401(m) safe harbor plans are based on either the employer making contributions that match each employee’s elective deferrals, or nonelective contributions to each employee’s account in the same amount whether or not the employee elects to defer. An additional safe harbor is available for qualified automatic contribution arrangement (QACA) plans, but they must have either a matching feature or a nonelective contribution feature.
For any of these safe harbor plans prior to the SECURE Act, the employer had to notify its eligible employees of their rights and obligations within a reasonable time prior to before any plan year. The SECURE Act eliminated the notice requirement for the traditional safe harbor 401(k) plans that satisfies safe harbor nonelective contribution requirements, and for the QACA safe harbor for 401(k) plans with a nonelective feature for plan years beginning after December 31, 2019. However, employers using traditional safe harbor Code Sec. 401(m) plans or QACA safe harbor plans with a matching feature were not relieved from this duty.
Prior to the SECURE Act, mid-year changes in nonelective status could only be made in limited circumstances (including economic hardship), and employees had to be notified. For plan years beginning after December 31, 2019, an employer may elect nonelective safe harbor status or automatic safe harbor status with a nonelective feature at any time before the 30th day before the close of the plan year. In addition, amendments after that time are allowed if: the amendment provides a nonelective contribution of at least four percent of compensation (rather than three) for all eligible employees for that plan year; and the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year.
However, plans using a matching safe harbor or automatic-enrollment safe harbor with a matching feature are not allowed to make a retroactive change to nonelective status in this manner.
Q&As. The IRS clarifies that QACA safe harbor 401(k) plans do not have to increase the maximum qualified percentage of compensation used to determine automatic elective contributions. Furthermore, if a plan incorporates the maximum qualified percentage by reference, the plan may continue to apply the maximum qualified percentage of 10 percent. However, the plan would need to be amended on or before the plan amendment deadline determined under Section 601(b) of the SECURE Act to provide explicitly that the plan’s maximum qualified percentage is 10%, retroactive to the first day of the first plan year beginning after December 31, 2019.
The IRS addressed what plan amendment timing rules apply to a plan amendment that increases the maximum qualified percentage of compensation used to determine automatic elective contributions to a percentage greater than 10% (but no greater than 15%) after the initial period of automatic elective contributions. In general, the plan amendment timing provisions of Act Sec. 601 of the SECURE Act, as described in Q&A G-1 of IRS Notice 2020-68, apply to a plan amendment adopted under Section 102 of the SECURE Act. In addition, a plan may be amended after the applicable plan amendment deadline in accordance with the general discretionary amendment deadlines set forth in Rev. Proc. 2016-37, as modified by Rev. Proc. 2020-40.
The IRS clarified that, if a traditional safe harbor 401(k) plan satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C), but also provides non-safe harbor matching contributions that are structured to satisfy the requirements of IRS Reg. §1.401(m)-3(d) (and, therefore, are not required to satisfy the actual contribution percentage (ACP) test), then the plan still must satisfy the safe harbor notice requirements of Code Sec. 401(m)(11)(A). However, if a traditional safe harbor 401(k) plan satisfying safe harbor nonelective contribution requirements also provides non-safe harbor matching contributions that are not intended to satisfy the requirements of IRS Reg. §1.401(m)-3(d) (and, therefore, are required to satisfy the ACP test), then the plan need not satisfy the safe harbor notice requirements of either Code Sec. 401(k)(12)(D) or Code Sec. 401(m)(11)(A).
The IRS covered a number of other issues related to safe harbor notice requirements and retroactive safe harbor status for plans that provide safe harbor nonelective contributions.
Comments. The IRS notes it is not providing comprehensive guidance as to Section 102 or Section 103 of the SECURE Act, but rather intends to assist taxpayers by providing guidance on particular issues while the Treasury Department and the IRS develop regulations to fully implement these sections of the SECURE Act. Comments on the guidance and any other aspects of Section 102 or Section 103 of the SECURE Act are invited. Comments should be submitted in writing on or before February 8, 2021.
Source: IRS Notice 2020-86.
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