IRS Notice 2020-52 Provides Guidance on Mid-Year Changes to Safe Harbor Plans | Practical Law
https://content.next.westlaw.com/Document/I0fb9a25aba1311eabea4f0dc9fb69570/View/FullText.html?transitionType=Default&contextData=(sc.Default)The Internal Revenue Service (IRS) has issued Notice 2020-52, which clarifies the requirements in Notice 2016-16 regarding reductions of contributions to safe harbor plans on behalf of highly compensated employees (HCEs). Notice 2020-52 also provides relief regarding mid-year amendments to safe harbor plans to reduce or suspend safe harbor contributions. This relief is intended to address certain challenges caused by the US outbreak of COVID-19.
The Internal Revenue Service (IRS) has issued Notice 2020-52, which clarifies the requirements in Notice 2016-16 regarding reductions of contributions to safe harbor plans on behalf of highly compensated employees (HCEs). Notice 2020-52 also provides relief regarding mid-year amendments to safe harbor plans to reduce or suspend safe harbor contributions. This relief is intended to address certain challenges caused by the US outbreak of COVID-19.
Provides relief regarding mid-year amendments to safe harbor plans to reduce or suspend safe harbor contributions. This relief is intended to address certain challenges caused by the US outbreak of COVID-19.
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).
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.