Pension & Benefits News IRS provides COVID-19 relief, clarifying mid-year safe harbor plan amendments
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Monday, July 27, 2020

IRS provides COVID-19 relief, clarifying mid-year safe harbor plan amendments

By Pension and Benefits Editorial Staff

The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions for a Code Sec. 401(k) or Code Sec. 401(m) plan that decreases only contributions made on behalf of highly compensated employees (HCEs). The IRS also provides temporary relief in connection with the ongoing Coronavirus Disease 2019 (COVID-19) pandemic from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor Code Sec. 401(k) or Code Sec. 401(m) plan adopted between March 13, 2020, and August 31, 2020, that reduces or suspends safe harbor contributions.

An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus COVID-19 relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension.

Mid-year amendments. Safe harbor contributions for a plan year may be amended during the plan year to reduce or suspend future matching or nonelective contributions only under certain conditions. Among the conditions are that the employer must either (1) be operating at an economic loss for the plan year, or (2) have included in the plan’s safe harbor notice for the plan year a statement that the plan may be amended during the plan year to reduce or suspend safe harbor contributions and that the reduction or suspension will not apply earlier than 30 days after all eligible employees are provided notice of the reduction or suspension.

The reduction or suspension of safe harbor contributions may be effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided a supplemental notice. Eligible employees 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 cash or deferred elections and, if applicable, their employee contribution elections.

Coronavirus COVID-19 relief for safe harbor contributions. The IRS is providing the following temporary relief with respect to a reduction or suspension of safe harbor contributions in order to provide employers with more flexibility during the COVID-19 pandemic, while retaining certain existing participant protections.

Reductions or suspensions of contributions. If a plan amendment that reduces or suspends safe harbor matching or safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirement that the employer either (1) is operating at an economic loss, or (2) has included in the plan’s safe harbor notice for the plan year a statement that (a) the plan may be amended during the plan year to reduce or suspend the safe harbor contributions and (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.

Supplemental notice requirement. If a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the supplemental notice requirements merely because a notice is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective, provided that (1) the supplemental notice is provided to eligible employees no later than August 31, 2020, and (2) the plan amendment that reduces or suspends safe harbor nonelective contributions is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

There is no relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions).

Contributions for HCEs clarified. Contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. Accordingly, a mid-year change that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions described in IRS Reg. §§ 1.401(k)-3(g) and 1.401(m)-3(h). However, a mid-year change that reduces only contributions made on behalf of HCEs would be a mid-year change to a plan’s required safe harbor notice content for purposes of IRS Notice 2016-16.

In order to satisfy the notice and election opportunity conditions of IRS Notice 2016-16, which apply generally to changes that affect required safe harbor notice content and are not reductions or suspensions of safe harbor contributions, the IRS clarifies that an updated safe harbor notice and an election opportunity (as required by IRS Notice 2016-16) must be provided to highly compensated employees to whom a mid-year change applies, determined as of the date of issuance of the updated safe harbor notice. This rule applies even if the change only applies to HCEs.

Source: IRS Notice 2020-52.

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