IRS Notice 2020-52 Provides Guidance on Mid-Year Changes to Safe Harbor Plans

Practical Law Legal Update w-026-2680 (Approx. 6 pages)

IRS Notice 2020-52 Provides Guidance on Mid-Year Changes to Safe Harbor Plans

by Practical Law Employee Benefits & Executive Compensation

Safe Harbor Plans

Employers offering 401(k) retirement savings plans to employees must not discriminate in favor of highly compensated employees. To comply with this requirement, 401(k) plans must satisfy complicated nondiscrimination testing rules. However, employers can avoid these burdensome and expensive tests by providing safe harbor employer contributions under Section 401(k)(12) of the Internal Revenue Code (Code) (26 U.S.C. § 401(k)(12)) or safe harbor matching contributions under Code Section 401(m) (26 U.S.C. § 401(m)) (safe harbor plans).

Generally, mid-year amendments to safe harbor plans are prohibited (26 C.F.R. § 1.401(k)-3(e)(1)), unless an exception applies (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Permissible Mid-Year Changes to Safe Harbor Plans). In Notice 2016-16, the IRS explained when a mid-year change to a safe harbor plan or a plan's required safe harbor notice does not violate the safe harbor plan rules (see Legal Update, IRS Notice 2016-16 Clarifies Permissible Mid-Year Changes to Safe Harbor Plans).

Employers that sponsor safe harbor plans must distribute safe harbor notices to all eligible employees within a reasonable time period before the beginning of the plan year (see Standard Document, Safe Harbor Notice for Qualified Retirement Plans). If a mid-year change is made to a safe harbor plan, a supplemental notice must be provided to affected employees at least 30 days before the effective date of the change (see Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: Mid-Year Notice: Notice Requirements).

In December 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) eliminated the notice requirement for nonelective contribution safe harbor 401(k) plans (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements: Rules Relating to Election of Safe Harbor Status).

Notice 2020-52

Notice 2020-52 provides:

Clarification regarding reductions of contributions on behalf of HCEs (see Reduction of Contributions on Behalf of HCEs).
Relief from certain requirements relating to reducing or suspending safe harbor contributions (see Relief Regarding Reductions or Suspensions of Safe Harbor Contributions).
Relief from the timing requirement for supplemental notices for safe harbor nonelective contributions (see Relief Regarding Supplemental Notice Timing Requirements).

According to the IRS, this relief is meant to afford flexibility to plan sponsors in light of the COVID-19 outbreak in the US while maintaining protections for plan participants.

Reduction of Contributions on Behalf of HCEs

Notice 2020-52 clarifies the requirements for plans that reduce contributions made on behalf of HCEs. Because contributions made on behalf of HCEs are not safe harbor contributions, mid-year amendments reducing such contributions do not violate the safe harbor rules. The IRS clarifies, however, that plans must provide an updated safe harbor notice and election opportunity to HCEs affected by the mid-year change in order to comply with Notice 2016-16.

The IRS notes in a footnote that Notice 2020-52 does not address the impact of the SECURE Act's changes on Notice 2016-16.

Relief Regarding Reductions or Suspensions of Safe Harbor Contributions

Notice 2020-52 provides that, if a plan amendment reducing or suspending safe harbor contributions is adopted between March 31, 2020, and August 31, 2020, the plan will not be treated as failing to meet the requirements that the plan either:

Is operating at an economic loss as described in Code Section 412(c)(2)(A) (26 U.S.C. § 412(c)(2)(A)).
Satisfies additional notice requirements in the safe harbor notice by including language that:
- discloses the possibility that the contributions might be reduced or suspended mid-year;
- provides that a supplemental notice will be provided to plan participants if a reduction or suspension does occur; and
- provides that the reduction or suspension will not apply until at least 30 days after the supplemental notice is sent.

(See Practice Note, Safe Harbor 401(k) Plans: Overview and Planning Opportunities: IRS Final Regulations Align Rules for Safe Harbor Matching and Nonelective Contributions.)

Relief Regarding Supplemental Notice Timing Requirements

Notice 2020-52 also provides relief from the requirement that supplemental notices for mid-year amendments reducing or suspending safe harbor nonelective contributions be provided to eligible employees at least 30 days before the reduction or suspension is effective (see Standard Document, Supplemental Notice to Participants Explaining the Reduction or Suspension of Matching or Nonelective Contributions to a Safe Harbor 401(k) Plan). This relief applies to amendments adopted between March 13, 2020, and August 31, 2020, provided that the:

Supplemental notice is provided no later than August 31, 2020.
Amendment is adopted no later than the date the reduction or suspension is effective.

This relief is not available with respect to mid-year amendments reducing or suspending safe harbor matching contributions.

403(b) Plans

The relief provided in Notice 2020-52 also applies to Code Section 403(b) plans that rely on the safe harbor rules in Code Section 401(m) (26 U.S.C. §§ 401(m) and 403(b)(12)) (see generally Practice Note, Code Section 403(b) Plans: Overview).

IRS Notice 2020-52 Provides Guidance on Mid-Year Changes to Safe Harbor Plans | Practical Law