IRS Provides Safe Harbor Amendment Flexibility

 

 

On June 29, the IRS issued Notice 2020-52, which extended temporary flexibility to plan sponsors of safe harbor 401(k) and 403(b) plans to reduce or suspend safe harbor matching or nonelective contributions this year. Pursuant to Notice 2020-52, plans need not meet certain requirements typically required for midyear amendments.

In general, to adopt a midyear amendment that reduces or suspends employer safe harbor contributions, employers must either:

  1. Demonstrate that they are operating at an economic loss, as defined under the safe harbor regulations; or
  2. Have included a conditional statement in their annual safe harbor notice indicating that they might amend the plan midyear to reduce or suspend employer safe harbor contributions.

In addition, plans that meet either condition are typically required to provide a supplemental notice to participants regarding the amendment at least 30 days in advance of the amendment and must pass nondiscrimination testing for the current year.

Reduction or Suspension of Safe Harbor Contributions for All Employees

As a result of Notice 2020-52, an employer may amend its safe harbor plan between March 13, 2020, and August 31, 2020, to reduce or suspend safe harbor contributions for all of its employees without having to provide proof of operating at an economic loss or having to provide a conditional statement in its annual safe harbor notice.

An employer who reduces or suspends nonelective safe harbor contributions for all employees is not required to provide the 30-day advance notice of the amendment, as long as notice of the amendment is sent to participants by August 31, 2020. However, amendments that reduce or suspend matching safe harbor contributions require the 30-day advance notice. In either case, the plan in question must still pass nondiscrimination Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests for the year under Notice 2020-52.

Reduction or Suspension of Safe Harbor Contributions for HCEs

Notice 2020-52 also clarified that if a plan is amended to remove or reduce safe harbor contributions to highly compensated employees (HCEs) only, HCEs must receive a supplemental notice regarding the amendment by August 31, 2020. However, ADP or ACP testing is not required, and the plan will retain its safe harbor status. In addition, the employer need not show economic loss or run nondiscrimination testing.

If you have any questions about IRS guidance or Coronavirus relief for plan sponsors, please contact your local Mutual of America representative.

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