IRS Issues Guidance on Mid-Year Changes to Safe Harbor Plans

In January 2016, the Internal Revenue Service (IRS) issued guidance outlining mid-year changes to safe harbor plans that fall under section 401(k) and 401(m) of the Internal Revenue Code (IRC). The notice states:

  • A mid-year change to a safe harbor plan or mid-year changes to the plan’s safe harbor notice does not violate safe harbor rules just because it is a mid-year change.
  • The plan sponsor must ensure that the applicable notice and election opportunity conditions be satisfied and the mid-year change is not a prohibited mid-year change according the plan rules.
  • This guidance is effective for all mid-year changes made on or after January 29th, 2016.

This is the first guidance issued by the IRS regarding mid-year changes for safe harbor plans. It was always widely assumed that no mid-year amendments could be made to a safe harbor plan, unless it was expressly permitted by safe harbor plan regulations. Per the guidance, a mid-year change is classified as “a change that is first effective during a plan year, but not as of the beginning of the plan year,” or “a change that is effective as of the beginning of the plan year, but adopted after the beginning of the plan year.”

The recently issued guidance also identifies the mid-year changes that are prohibited unless they are specifically required by applicable law. They are:

  • A mid-year increase in the number of completed years of service required for an employee to have a non-forfeitable right to his or her account balance attributable to QACA safe harbor contributions.
  • A mid-year reduction in number, or otherwise narrowing, of the group of employees eligible to receive safe harbor contributions.
  • A mid-year change to the type of safe harbor plan, such as changing from a traditional 401(k) safe harbor plan to a QACA 401(k) safe harbor plan.
  • A mid-year change to modify or add a matching contribution formula (including the definition of compensation used to determine matching contributions), if the change increased the amount of matching contributions, or to permit discretionary matching contributions.
  • IRS guidance is now clear regarding mid-year changes to safe harbor plans or to plans that have safe harbor provisions.

For additional details regarding these changes, please click here.