MID-YEAR AMENDMENTS TO SAFE HARBOR 401(k) PLANS – THE IRS BACKS OFF

For the past few years, there has been great concern in the benefits community about the IRS position on making mid-year amendments to 401(k) plans. Relying on ambiguously-worded language in the Regulations under Sections 401(k) and 401(m), the Service had ominously (but informally) indicated that any amendment to a plan that had elected safe harbor status for a plan year was suspect if it became effective during such plan year. The consequences of such a prohibited amendment were, at a minimum, the loss of the safe harbor election for the year (thus subjecting the plan to ADP and ACP testing), and the potential of plan disqualification (for violating the provisions of the safe harbor).

Over time, it became apparent that this position was not sustainable in the extreme, and the IRS began to carve out exceptions. Changes such as a mid-year replacement of a plan trustee and other inconsequential revisions to plan provisions (including Roth elections) were recognized as not violating the prohibition on mid-year amendments. Indeed, certain changes were mandated by law (relating to same sex spouses) and IRS procedures (the entire PPA restatement process itself could be claimed to violate the mandate against mid-year amendments). Still, there remained a high level of uncertainty about what could, and could not, be amended.

Finally, after years of silence despite repeated requests from ASPPA, among others, the IRS has now issued Notice 2016-16, in which it has significantly backed off its hard-line stance. There remain a few prohibited amendments, but these are neither surprising nor oppressive. For the most part, mid-year amendments are permitted, as long as they do not adversely affect the expectations of plan participants, and appropriate notice of such changes is provided (reasonable advance notice and an opportunity to make a new deferral election is required, but even most retroactive amendments are permitted with notice as soon as reasonably possible).

The following are among those provided as examples of permissible changes made mid-year:

  • The increase of future safe harbor non-elective contributions from 3% to 4%.
  • A retroactive increase in a safe harbor matching contribution for the plan year.
  • The addition of an in-service withdrawal provision.
  • A change in the plan’s default investment fund.
  • A change to the plan entry date for future participants.

One can extrapolate that other common amendments, such as the addition of a loan program or revisions to distribution options, are no longer problematic.

Explicitly prohibited are the following mid-year changes:

  • Increasing the years of service required for an employee to be vested in QACA contributions.
  • Reducing or narrowing the group eligible to receive safe harbor contributions.
  • Changing the type of safe harbor (i.e., switching from non-elective to matching or vice-versa).
  • Changing or adding a formula used to determine matching contributions (or the definition of compensation used to determine such contributions), or to permit discretionary matching contributions. However, even such amendments are permitted if they occur at least three months prior to the end of the plan year, such changes are made retroactive for the year, and an updated safe harbor notice and election are provided to participants.

Clarity is always welcome, and a reasonable approach is doubly appreciated. It would appear that the IRS took the comments of practitioners seriously, perhaps recognizing that there was little legal support, and no practical objectives to be achieved, for its hard-line position.

About MandMarblestone Group llc

The MandMarblestone Group is one of the oldest and most trusted providers of ERISA based retirement plan solutions and services. Key to our success is the in-depth experience of our in-house ERISA attorneys who have developed and service-marked our retirement plan design encompassing an unprecedented flexibility to accommodate the changing tax, financial, operational and corporate succession planning needs of our clients. In addition to providing the full range of administrative, compliance and tax filing services, the MandMarblestone Group has also provided legal, consulting, expert witness and plan remediation services on behalf of clients with matters before the Department of Labor and the Internal Revenue Service.
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