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IRS Notice 2016-16 provides that a mid-year amendment to a safe-harbor retirement plan or safe-harbor notice will not violate safe-harbor rules.

IRS Expands Ability to Make Safe-Harbor Plan Amendments

IRS Notice 2016-16 provides that a mid-year amendment to a safe-harbor retirement plan or safe-harbor notice will not violate safe-harbor rules. 

Background
 
Safe-harbor rules require a plan sponsor to make minimum, fully vested contributions. The sponsor must provide a notice explaining the safe-harbor provisions to plan participants at least 30 days prior to the beginning of any plan year in which it intends to make safe-harbor contributions. Previously, once plan sponsors provided the notice to participants, they could not amend their safe-harbor plan mid-year except under certain circumstances.
 
New Guidance
 
Under Notice 2016-16, a mid-year change is considered a change that is first effective during the plan year, but not effective as of the beginning of the plan year; or one that is effective as of the beginning of the plan year, but not adopted until after the beginning of the plan year.
 
If the mid-year change modifies the content of a plan’s safe-harbor notice, then the plan sponsor must issue an updated safe-harbor notice 30-90 days prior to the change becoming effective. Each employee that is required to receive a safe-harbor notice must also be given a reasonable opportunity after the receipt of the updated notice and before the effective date of the mid-year change to alter the participant’s salary deferral election.  A reasonable opportunity is considered at least 30 days.
 
Prohibitions

 

Mid-year changes are now allowed. However, these mid-year changes are specifically prohibited by the IRS: 
  • Increasing an employee’s required number of completed years of service.
  • Reducing the number of employees eligible to receive safe-harbor contributions.
  • Changing the type of safe-harbor plan.
  • Modifying how the plan determines matching contributions.
These changes should help make safe-harbor plans more attractive to employers. However, plan sponsors wishing to make mid-year changes to plans must be aware of the rules for updating the safe-harbor notices to plan participants as well as mid-year modifications to plans.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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