IRS Issues New Guidance for Mid-Year Changes to Safe Harbor 401(k) and 403(b) Plans

On June 29, 2020, the IRS issued Notice 2020-52 addressing mid-year reductions and suspensions of contributions to Safe Harbor 401(k) and 403(b) plans. In response to the COVID-19 pandemic, the Notice provides some temporary relief for plan sponsors that wish to reduce or eliminate safe harbor contributions mid-year.

Under normal circumstances, a plan sponsor may implement a mid-year reduction or suspension of safe harbor contributions if the employer either:

Is operating at an economic loss for the year or

Has included in the safe harbor notice for the plan year a statement that the employer may change contributions mid-year and that the change will not be implemented until at least 30 days after a supplemental notice regarding the change is provided.

Employers that did not reserve the right to cease contributions have struggled with whether they could meet the economic loss requirement. However, the Notice provides temporary relief allowing a plan sponsor to terminate safe harbor contributions mid-year even if these requirements are not met, provided the amendment is adopted between March 31, 2020, and August 31, 2020. The plan sponsor still must provide a supplemental notice to eligible employees but the timing requirements differ depending on whether the plan provides for safe harbor nonelective contributions or safe harbor matching contributions.

Safe harbor nonelective contributions may be reduced or suspended if the supplemental notice is provided no later than August 31, 2020, and the plan amendment is adopted on or before the effective date of the reduction or suspension. On the other hand, safe harbor matching contributions may be reduced or suspended only if the supplemental notice is provided at least 30 days before the reduction or suspension is effective.

If safe harbor contributions are reduced or suspended under the temporary relief measures, the plan sponsor still must meet the other procedural requirements that apply to mid-year changes. This includes satisfying the applicable nondiscrimination tests for the plan year and, in the case of matching contributions, giving participants a reasonable opportunity to change their contribution elections after the supplemental notice and before the reduction comes into effect.

In addition to the temporary relief for reducing all safe harbor contributions, Notice 2020-52 clarifies that contributions for highly compensated employees (HCEs) are not safe harbor contributions. This means plan sponsors do not need to meet the requirements that apply when reducing or suspending safe harbor contributions. Instead, to implement a mid-year reduction or suspension in contributions to HCEs, plan sponsors need only provide an updated safe harbor notice and an opportunity to update contribution elections.

Notice 2020-52 provides helpful relief and guidance for plans that have or are considering reductions in safe harbor contributions or reductions to HCE contributions this year.

Please contact your Faegre Drinker attorney with questions regarding this guidance.