IRS Notice 2020-52 provides welcome relief to plan sponsors considering suspending safe harbor matching contributions or safe harbor nonelective contributions (or who already suspended safe harbor contributions during 2020) in response to the coronavirus (COVID-19) pandemic.
On June 29, the Internal Revenue Service issued guidance providing new COVID-19-related relief and other clarifications for sponsors considering mid-year changes to their safe harbor 401(k) plans. The guidance, set out in Notice 2020-52 (the Notice), provides helpful clarification that sponsors can eliminate safe harbor 401(k) contributions for “highly compensated employees” (HCEs) only and retain the plan’s safe harbor status, provided that the safe harbor 401(k) contributions continue to be made for non-highly compensated employees (NHCEs).
In addition, the Notice provides temporary relief related to COVID-19, allowing plan sponsors to adopt mid-year amendments between March 13, 2020 and August 31, 2020 to eliminate safe harbor matching contributions or mid-year nonelective contributions and be deemed to have satisfied the threshold “operating at an economic loss” or the “safe harbor notice” content requirements for any mid-year suspension of safe harbor contributions.
Finally, the Notice includes relief from the 30-day advance supplemental notice requirement for suspension of safe harbor nonelective contributions (but not for suspension of safe harbor matching contributions) provided the supplemental notice is provided no later than August 31, 2020. Each of these is summarized below.
- “Clarification” that suspending contributions only for HCEs does not cause plan to lose safe harbor status. The 401(k) safe harbor regulations only require that safe harbor contributions—whether safe harbor matching contributions or safe harbor nonelective contributions—be provided to NHCEs. That is, there is nothing in the regulations requiring that all participants receive safe harbor contributions, implying that a plan that provides safe harbor contributions only to NHCEs would still be eligible to be treated as a safe harbor plan. Nevertheless, according to the Notice, the US Department of the Treasury and the IRS received comments asking whether a mid-year suspension of safe harbor contributions to just HCEs would be permissible.
To address these comments, the Notice clarifies that because the safe harbor rules only require the safe harbor contributions to be made to NHCEs, a mid-year reduction of contributions to HCEs does not impact safe harbor status. In addition, this reduction would be allowed even if the plan’s safe harbor notice did not contain the language regarding a possible reduction/suspension of contributions mid-year. However, because the safe harbor notice would have indicated that HCEs are eligible for the contribution, the HCEs need to be provided an updated safe harbor notice and election opportunity prior to the suspension of contributions.
- Expanded COVID-19 Eligibility to Suspend or Reduce Safe Harbor Contributions Mid-Year. As a threshold requirement to the mid-year suspension or reduction of safe harbor contributions, either the plan sponsor must be operating at an economic loss for the plan year or the applicable safe harbor notice must have included a notice of the ability to suspend or reduce the safe harbor contributions. Under the Notice, if a plan suspends or reduces safe harbor contributions between March 13, 2020 and August 31, 2020, it will be treated as meeting these threshold requirements (i.e., having included a statement regarding reduction in safe harbor notice for 2020 or is operating at an economic loss for 2020). While many plan sponsors may have included the required statement in their safe harbor notices, the Notice provides special relief to plan sponsors who did not and were struggling to determine whether they were eligible under the economic loss condition.
- Expanded Notice Deadline for Mid-Year Suspension of Safe Harbor Nonelective Contributions. Any safe harbor plan adopting a mid-year amendment (i) to suspend or reduce safe harbor contributions, or (ii) to change a plan provision that is required to be described in the safe harbor notice must provide an updated safe harbor notice at least 30 days in advance of the effective date of the change to allow participants to change their deferral elections. The Notice provides temporary relief to the 30-day advance notice requirement for suspensions or reductions to safe harbor nonelective contributions, as long as the updated safe harbor notice is provided no later than August 31, 2020 and the plan amendment is adopted prior to the effective date of the suspension.
Plan sponsors should keep in mind that the IRS continues to require at least 30 days' advance notice for mid-year suspensions or reductions to safe harbor matching contributions because whether these contributions are provided can influence the employee’s decision on whether to make elective deferrals.
The Notice may be helpful to plan sponsors who have suspended or reduced, or are considering suspending or reducing, safe harbor matching contributions or safe harbor nonelective contributions in response to the COVID-19 pandemic. And perhaps equally important for future years is the IRS’s clarification that a plan can maintain its safe harbor status when it is an NHCE-only safe harbor plan, meaning plan sponsors have another tool for cost savings in future years.