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Midyear changes allowed for 401(k) safe harbor plans

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in Office Management,Payroll Management

If you don’t want the hassle of annual 401(k) plan discrimination testing, you can adopt a 401(k) safe harbor plan. But there have always been limitations on these plans. The IRS has now eliminated one huge obstacle by allowing you to make many midyear amendments to your plan or to the safe harbor notices employees must receive. (Notice 2016-16, IRB 2016-7)

New flexibility for safe harbor plans. Until now, 401(k) safe harbor plans generally couldn’t make midyear amendments. The IRS has flipped the switch and will allow plans to make amendments that are first effective during a plan year, but not at the beginning of the plan year, or amendments that are effective at the beginning of a plan year, but adopted after the beginning of the plan year.

Employees must receive updated safe harbor notices if the content of the notice changes due to the midyear amendments. Notices must be provided within the regular time frame: at least 30 days and not more than 90 days before the change. Employees must also have a chance to change their elections before the effective date of the change; a 30-day election period will suffice.

The seven deadly plan amendments. Safe harbor plans still don’t have carte blanche, however. According to the IRS, the following amendments can’t be made midyear:

  1. Changes that increase the number of years an employee must work before benefits vest in a qualified automatic contribution arrangement.
  2. Changes that reduce the number or otherwise narrow the group of employees who are eligible to receive safe harbor contributions. Plans may still make changes that impact employees who aren’t eligible to receive safe harbor contributions on the date the amendment is effective or adopted.
  3. Changes to the type of safe harbor plan (e.g., from a traditional safe harbor plan to a qualified automatic contribution arrangement).
  4. Changes to modify (or add) a formula used to determine matching contributions or to the definition of compensation used to determine matching contributions, if the changes increase the amount of matching contributions, or permit discretionary contributions.

Exception: This prohibition doesn’t apply if at least three months prior to the end of the plan year, the change is adopted, employees receive an updated safe harbor notice and a new election opportunity, and the change is made retroactive to the beginning of the plan year.

These midyear changes generally remain off limits:

  1. Adoption of a short plan year or changes to the plan year.
  2. Adoption of safe harbor plan status on or after the beginning of the plan year, unless an exception applies.
  3. Reduction or suspensions of safe harbor contributions or changes from a safe harbor plan to a traditional 401(k) plan.

THINK BEFORE YOU AMEND: Midyear amendments are still subject to the anti-cutback rules, nondiscrimination rules and anti-abuse rules.

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