IRS Notice 2020-86 Provides Guidance on SECURE Act Provisions Affecting Safe Harbor Plans | Practical Law

IRS Notice 2020-86 Provides Guidance on SECURE Act Provisions Affecting Safe Harbor Plans | Practical Law

Internal Revenue Service (IRS) Notice 2020-86 provides Q&A guidance on provisions under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) affecting safe harbor plans.

IRS Notice 2020-86 Provides Guidance on SECURE Act Provisions Affecting Safe Harbor Plans

by Practical Law Employee Benefits & Executive Compensation
Published on 14 Dec 2020 • USA (National/Federal)
Internal Revenue Service (IRS) Notice 2020-86 provides Q&A guidance on provisions under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) affecting safe harbor plans.
On December 9, 2020, the IRS issued Notice 2020-86, which provides Q&A guidance on provisions under the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) affecting safe harbor plans (see Legal Update, Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements).

SECURE Act Provisions Affecting Safe Harbor Plans

The SECURE Act made changes to safe harbor plans effective for plan years beginning after December 31, 2019, including:
  • Increasing the limit on the maximum automatic deferral rate for a Qualified Automatic Contribution Arrangement (QACA) from 10% to 15% (10% for the participant's first year of participation).
  • Eliminating the notice requirement for nonelective employer contribution safe harbor 401(k) plans.
  • Permitting 401(k) plans to be amended to become nonelective 401(k) safe harbor plans:
    • at any time before the 30th day before the close of the plan year; or
    • after the 30th day before the last day of the plan year if the plan provides for a nonelective contribution of at least 4% of an employee's compensation for all eligible employees and the amendment is made before the last day for distributing excess contributions for the plan year.

Notice 2020-86

Notice 2020-86 provides guidance to address SECURE Act provisions affecting safe harbor 401(k) plans, including that:
  • QACA safe harbor 401(k) plans are not required to increase the automatic deferral rate to the maximum limit of 15% in order to maintain their status as a QACA, if certain requirements are met.
  • If a plan incorporates by reference the maximum limit of 15% in Code Section 401(k)(13)(C)(iii) (26 U.S.C. § 401(k)(13)(C)(iii)), but still applies the 10% (that was previously applicable before the SECURE Act), it fails to operate in accordance with its terms unless an amendment is adopted no later than the last day of the first plan year beginning on or after January 1, 2022.
  • A safe harbor 401(k) plan must meet the safe harbor notice requirements if the plan provides for a non-safe harbor matching contribution so that the plan does not need to satisfy the actual contribution percentage (ACP) test.
  • A safe harbor 401(k) plan does not need to meet the safe harbor notice requirements if the plan provides for a non-safe harbor matching contribution and is required to satisfy the ACP test.
Other guidance regarding the SECURE Act provisions that affect safe harbor 401(k) plans is contained in Notice 2020-86. Notice 2020-86 also applies to Code Section 403(b) plans that apply the safe harbor rules under Section 401(m).
The IRS requests comments on the guidance and Sections 102 and 103 of the SECURE Act. Comments are due by February 8, 2021.

Practical Implications

Employers (and practitioners that assist employers) that maintain safe harbor 401(k) plans should review Notice 2020-86 to ensure compliance with the SECURE Act provisions affecting safe harbor 401(k) plans. While Notice 2020-86 is not intended to be comprehensive guidance, it may help with certain common issues affecting employers.