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401(k) Plans

IRS Provides Relief and Clarifies 401(K), 401(M) Mid-Year Amendments Requirements

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

In a Notice, the IRS has provided temporary relief, in connection with the ongoing COVID-19 pandemic, from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan adopted between March 13, 2020, and August 31, 2020, that reduces or suspends safe harbor contributions. The Notice also clarifies the requirements that apply to a mid-year amendment to a safe harbor 401(k) or 401(m) plan that reduces only contributions made on behalf of highly compensated employees (HCEs).

Background—safe harbor regs.

Under Code Sec. 401(a)(4) and Reg. § 1.401(a)(4)-1(b)(2), contributions or benefits provided under a qualified retirement plan must not be discriminatory in amount in favor of highly compensated employees (HCEs).

Under Code Sec. 401(k)(3), Reg. §1.401(k)-1(a)(4)(iv)(A), and Reg. §1.401(k)-1(b)(1)(ii)(A), a 401(k) plan satisfies this requirement if elective contributions made on behalf of eligible employees for a year satisfy the actual deferral percentage (ADP) test described in Reg. § 1.401(k)-2.

Under Code Sec. 401(m)(2), Reg. §1.401(m)-1(a)(1)(i), and Reg. §1.401(m)-1(b)(1)(i), a similar test, the actual contribution percentage (ACP) test, applies to matching contributions and employee contributions.

As an alternative to satisfying the annual ADP and ACP test, a plan may be structured to use a safe harbor plan design. A “safe harbor plan” is a plan that includes a cash or deferred arrangement (CODA) described in Code Sec. 401(k)(12) (traditional safe harbor 401(k)) or Code Sec. 401(k)(3) (qualified automatic contribution arrangement (QACA) safe harbor 401(k)), or a matching contribution described in Code Sec. 401(m)(11) (traditional safe harbor 401(m)) or Code Sec. 401(m)(12) (QACA safe harbor 401(m)).

Background—safe harbor contributions.

Under Reg. § 1.401(k)-3(a)(1), a traditional safe harbor 401(k) plan is required to satisfy the safe harbor contribution requirements of either Reg. § 1.401(k)-3(b) (safe harbor nonelective contributions) or Reg. § 1.401(k)-3(c) (safe harbor matching contributions) for the plan year. Under Reg. § 1.401(k)-3(b) and Reg. § 1.401(k)-3(c), contributions must be made on behalf of each eligible employee who is not an HCE (NHCE).

Similarly, under Reg. § 1.401(m)-3(a)(1), a traditional safe harbor 401(m) plan is required to satisfy the safe harbor contribution requirements of either Reg. § 1.401(m)-3(b), which cross-references the safe harbor nonelective contribution requirements of Reg. § 1.401(k)-3(b), or Reg. § 1.401(m)-3(c), which cross-references the safe harbor matching contribution requirements of Reg. § 1.401(k)-3(c), for the plan year.

Under Reg. § 1.401(k)-3(a)(2), a QACA safe harbor 401(k) plan is required to satisfy the safe harbor contribution requirements of Reg. § 1.401(k)-3(k) for the plan year. Under Reg. § 1.401(k)-3(k)(1), a QACA safe harbor 401(k) plan must satisfy either the safe harbor nonelective contribution requirements of Reg. § 1.401(k)-3(b) or the safe harbor matching contribution requirements of Reg. § 1.401(k)-3(c), as modified by Reg. § 1.401(k)-3(k)(2) and Reg. § 1.401(k)-3(k)(3).

Similarly, under Reg. § 1.401(m)-3(a)(2), a QACA safe harbor 401(m) plan is required to satisfy the safe harbor requirements of Reg. § 1.401(k)-3, including the safe harbor contribution requirements of Reg. § 1.401(k)-3(k).

Subject to certain requirements, a plan that includes safe harbor contributions also may include contributions that are not safe harbor contributions. For example, a traditional safe harbor 401(k) plan that includes safe harbor nonelective contributions may also provide either

  1. A discretionary matching contribution of 4% of safe harbor compensation that would not need to satisfy the ACP test because the contribution satisfies the requirements of Reg. § 1.401(m)-3(d) (including the limits on matching rate increases, matching contributions, and matching rates on behalf of HCEs as compared to matching rates on behalf of NHCEs), or
  2. A discretionary matching contribution in excess of 4% of safe harbor compensation that would need to satisfy the ACP test because the contribution does not satisfy the limit on discretionary matching contributions under Reg. § 1.401(m)-3(d)(3)(ii). Under Reg. § 1.401(k)-3(a)(3), neither of these types of additional matching contributions are referred to as safe harbor contributions.

Code Sec. 403(b) plans (generally found at public schools and tax-exempt organizations) may apply the 401(m) safe harbor rules pursuant to Code Sec. 403(b)(12).

Background—mid-year changes to safe harbor plans and notices.

Reg. § 1.401(k)-3(e)(1) provides that, in general, a plan will fail to satisfy the requirements of Code Sec.401(k)(12), Code Sec. 401(k)(13), and Reg. § 1.401(k)-3 unless plan provisions that satisfy the safe harbor plan rules of Reg. § 1.401(k)-3 are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year.

In addition, Reg. § 1.401(k)-3(e)(1) provides that, except as provided in Reg. § 1.401(k)-3(g) or in guidance of general applicability published in the IRB, a plan that includes provisions that satisfy the safe harbor plan rules of Reg. § 1.401(k)-3 will not satisfy the nondiscrimination requirements for 401(k) plans for a plan year if the plan is amended to change those provisions during the plan year.

Reg. § 1.401(m)-3(f) includes similar provisions for traditional safe harbor 401(m) plans.

Reg. § 1.401(k)-3(g) provides that a plan that includes safe harbor contributions for a plan year may be amended during the plan year to reduce or suspend future safe harbor matching contributions or safe harbor nonelective contributions if the plan is also amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs (using the current year testing method) and if certain other requirements are satisfied. Reg. § 1.401(k)-3(g)(1)(i) sets forth the requirements for a mid-year reduction or suspension of safe harbor matching contributions, and Reg. § 1.401(k)-3(g)(1)(ii) sets forth the requirements for a mid-year reduction or suspension of safe harbor nonelective contributions.

Under Reg. § 1.401(k)-3(g)(1)(i)(A) and Reg. § 1.401(k)-3(g)(1)(ii)(A), the employer must either

  1. Be operating at an economic loss (as described in Code Sec. 412(c)(2)(A)) for the plan year, or
  2. Have included in the plan’s safe harbor notice (as described in Reg. § 1.401(k)-3(d)) for the plan year a statement that the plan may be amended during the plan year to reduce or suspend safe harbor contributions and that the reduction or suspension will not apply earlier than 30 days after all eligible employees are provided notice of the reduction or suspension.

Under Reg. § 1.401(k)-3(g)(1)(i)(C) and Reg. § 1.401(k)-3(g)(1)(ii)(C), the reduction or suspension of safe harbor contributions may be effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the supplemental notice described in Reg. § 1.401(k)-3(g)(2). Under Reg. § 1.401(k)-3(g)(1)(i)(D) and Reg. § 1.401(k)-3(g)(1)(ii)(D), eligible employees must be given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of safe harbor contributions to change their cash or deferred elections and, if applicable, their employee contribution elections.

Reg. § 1.401(m)-3(h) provides rules similar to those of Reg. § 1.401(k)-3(g) for a reduction or suspension of future safe harbor matching contributions or safe harbor nonelective contributions in a traditional safe harbor 401(m) plan.

Background—Not. 2016-16.

Notice 2016-16, 2016-7 IRB, provides that a mid-year change (defined as changes that are first effective during a plan year but not effective as of the beginning of the plan year, or that are effective as of the beginning of the plan year but adopted after that time) to a safe harbor plan or to a plan’s required safe harbor notice content won’t violate the safe harbor regs solely on account of being made mid-year, provided that:

  1. If it is a mid-year change to a plan’s required safe harbor notice content, certain notice and election opportunity conditions are satisfied, and
  2. The mid-year change is not on the list of prohibited mid-year changes contained in Notice 2016-16.

See New guidance on permissible mid-year changes involving safe harbor plans (02/04/2016)

Clarification of requirements for reducing contributions made on behalf of HCEs.

Notice 2020-52,2020-29 IRB, clarifies that a mid-year change that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions described in Reg. §1.401(k)-3(g) and Reg. §1.401(m)-3(h).

However, a mid-year change that reduces only contributions made on behalf of HCEs would be a mid-year change to a plan’s required safe harbor notice content for purposes Notice 2016-16. Therefore, in order to satisfy the notice and election opportunity conditions of Notice 2016-16, which apply generally to changes that affect required safe harbor notice content and are not reductions or suspensions of safe harbor contributions, an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies, determined as of the date of issuance of the updated safe harbor notice. (Notice 2020-52, Sec. III)

Relief for mid-year reductions and suspensions.

Due to the unprecedented nature of the COVID-19 pandemic, the IRS is providing the following temporary relief with respect to a reduction or suspension of safe harbor contributions in order to provide employers with more flexibility during the COVID-19 pandemic, while retaining certain existing participant protections:

Temporary relief related to mid-year reductions or suspensions of safe harbor matching or safe harbor nonelective contributions. If a plan amendment that reduces or suspends safe harbor matching contributions or safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirements in Reg. §1.401(k)-3(g)(1)(i)(A), Reg. § 1.401(k)-3(g)(1)(ii)(A), and Reg. § 1.401(m)-3(h). (Notice 2020-52, Sec. IV.A)

Temporary relief related to the supplemental notice requirement for mid-year reductions or suspensions of safe harbor nonelective contributions. If a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirements of Reg. §1.401(k)-3(g)(1)(ii) or Reg. §1.401(m)-3(h) merely because a supplemental notice is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective, provided that

  1. The supplemental notice is provided to eligible employees no later than August 31, 2020, and
  2. The plan amendment that reduces or suspends safe harbor nonelective contributions is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

The Notice does not provide relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions under Reg. §1.401(k)-3(g)(1)(i) or Reg. §1.401(m)-3(h) because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions). (Notice 2020-52, Sec. IV.B)

Relief for 403(b) plans.

The Notice provides that sections III and IV of the Notice apply on similar terms to 403(b) plans that apply the 401(m) safe harbor rules pursuant to Code Sec. 403(b)(12). (Notice 2020-52, Sec. V)

To continue your research on requirements for 401(k) plans, including safe harbor plan designs, see FTC 2d/FIN ¶H-9050 et seq.; United States Tax Reporter ¶4014.176 et seq. For employee contributions and matching employer contributions, see FTC 2d/FIN ¶H-6555 et seq.; United States Tax Reporter ¶4014.21 et seq.

 

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