The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27 contains several emergency measures affecting retirement plans. The CARES Act gives plan sponsors the option of making available to participants, effective immediately, penalty-free coronavirus-related distributions as well as plan loans increased beyond the amount otherwise permitted under Internal Revenue Code (IRC) 72(p). Plan amendments for these provisions need not be adopted until the last day of the plan year beginning in 2022 (2024 for governmental plans). As plan sponsors eagerly put into place a portion or all of these relief measures, it is important to consider the special mid-year amendment rules that apply to safe harbor 401(k) plans.
Safe harbor 401(k) plans are exempt from the annual nondiscrimination tests (the ADP and in some cases, the ACP tests) that apply to traditional 401(k) plans, provided they satisfy a number of requirements. These include, among other things, the requirement that the safe harbor provisions, in general, are adopted before the beginning of a plan year and remain in effect for an entire 12-month plan year without modification, and that a safe harbor notice describing participants’ rights and obligations under the plan is distributed to eligible employees. This notice, which must be distributed within a reasonable period before each plan year (and which may be provided electronically), must generally describe:
- the plan’s safe harbor contribution formula;
- any other contributions under the plan or matching contributions to another plan on account of elective contributions or employee contributions under the 401(k) plan and the conditions under which the contributions are made;
- the plan to which safe harbor contributions will be made if different from the 401(k) plan;
- the type and amount of compensation that may be deferred under the plan;
- how to make deferral elections;
- the periods available under the plan for making elections;
- the plan’s withdrawal and vesting provisions; and
- certain contact information for the plan.
If the plan is a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan, the notice must also describe:
- the default level of elective contributions that will be made on the employee’s behalf;
- the employee’s right to elect not to have elective contributions made on the employee’s behalf (or to elect a different amount or percentage of compensation); and
- how contributions under the automatic contribution arrangement will be invested, including, if an employee may elect among two or more investment options, how contributions will be invested absent an affirmative election by the employee.
Until 2016, the mid-year amendment rules significantly limited plan sponsors from making changes to safe harbor 401(k) plans after the start of a plan year. Even if a plan change had nothing to do with the plan’s safe harbor provisions, plan sponsors were concerned that the change would be impermissible under the safe harbor rules if it had an impact on the plan’s safe harbor notice. On January 29, 2016, however, the IRS issued Notice 2016-16, which provides guidance on mid-year changes to safe harbor 401(k) plans. Pursuant to Notice 2016-16, a mid-year change to a 401(k) safe harbor plan, or to a plan’s safe harbor notice, does not violate the safe harbor rules as long as:
- the plan amendment is not explicitly prohibited under Notice 2016-16, and
- the plan administrator provides an updated safe harbor notice describing any mid-year change (and its effective date) to information that is required to be included in a plan’s pre-year safe harbor notice. It should be emphasized that an updated notice is not required for changes to information that is not required safe harbor notice content or if the mid-year change and its effective date was described in the pre-plan year annual safe harbor notice. An updated safe harbor notice, if required, must be provided within a reasonable period (at least 30 days) before the effective date of the change. However, if it is not practicable for the updated notice to be provided before the effective date of the change, it may be provided as soon as practicable, but no later than 30 days after the change is adopted.
Employees to whom the safe harbor notice must be provided must have a reasonable period of time (at least 30 days) before the effective date of the change to modify their elective and/or after-tax employee contributions. If it is not practicable for this period to begin before the effective date of the change, a reasonable period is deemed to be given if it begins as soon as practicable after the date the updated notice is provided, but no later than 30 days after the change is adopted.
Explicitly prohibited mid-year amendments include changes that:
- in the case of a QACA, increase the number of years of service needed for a participant to acquire a fully vested right to his or her safe harbor contribution account balance;
- reduce the number or narrow the group of employees eligible for safe harbor contributions (though a change to a plan’s eligibility service crediting or entry date rules that only affects employees who are not already eligible for safe harbor contributions is permitted);
- make change to the type of safe harbor (e.g., traditional to QACA or vice versa); or
- (i) modify or add a formula to determine matching contributions, or modify the definition of compensation used for matching contributions, if the result (in either case) is to increase the amount of matching contributions, or (ii) add a discretionary matching contribution provision, unless (in either case) the change is adopted at least three months before the end of the plan year on a retroactive basis for the full plan year and an updated safe harbor notice and election opportunity are provided.
The relief provided under the CARES Act, if adopted, would not result in an explicitly prohibited plan amendment under Notice 2016-16. However, the relief relating to coronavirus distributions would impact a plan’s safe harbor notice, since withdrawal provisions must be described therein. As of the date of publication, there is no guidance excusing plan sponsors from providing an updated safe harbor notice under Notice 2016-16. Plan sponsors should be careful, in this environment of quickly passed legislation and abundant need on the part of employees for economic relief, not to neglect the fundamental rules relating to mid-year changes to safe harbor 401(k) plans.