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IRS Expands Ability to Make Mid-Year Amendments to Safe-Harbor Retirement Plans

Apr 12, 2016

IRS Notice 2016-16 will help retirement plan sponsors comply with the safe-harbor plan notice rules for making mid-year changes.  The Notice provides that a mid-year amendment to a safe-harbor plan (typically a 401(k) plan or a 403(b) plan) or to a safe-harbor notice will not violate the safe-harbor rules provided that 1) the plan satisfies the notice and election opportunity conditions, if applicable and 2) the mid-year change is not expressly prohibited in Notice 2016-16.


Safe-harbor 401(k) plans are exempt from certain annual nondiscrimination testing (the actual deferral percentage test (“ADP”) and the actual contribution percentage (“ACP”) test).  In exchange for this exemption, the safe-harbor rules require that the plan sponsor make certain specified minimum contributions, which are also fully (100%) vested when contributed.  The plan sponsor is also required to 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 to the plan.  Under prior IRS guidance, once plan sponsors provided the notice to participants, they could not amend their safe-harbor plan mid-year unless the plan sponsor was either operating at an economic loss or it had previously provided participants with a notice of the possibility to reduce or suspend safe-harbor employer contributions.

New Guidance Under Notice 2016-16

Under the Notice, a mid-year change is one of the following types of changes: 

  1. A change that is first effective during the plan year, but not effective as of the beginning of the plan year.
  2. A change 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 not less than 30 days and not more than 90 days prior to the change becoming effective. Further, each employee that is required to receive a safe-harbor notice must be given a reasonable opportunity (including a reasonable period after the receipt of the updated notice) before the effective date of the mid-year change to make a change to the participant’s salary deferral election.  For this purpose a reasonable opportunity means at least 30 days. 

Additionally, the Notice changes rules regarding mid-year changes to safe-harbor plans.  Under prior guidance from IRS, any mid-year change was assumed to be prohibited unless expressly allowed under the guidance.  Now, mid-year changes are assumed to be allowed unless specifically prohibited under IRS guidance.  Accordingly, the Notice specifically prohibits the following mid-year changes: 

  1. Increasing an employee’s required number of completed years of service to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (“QACA”).
  2. A reduction in the number of employees eligible to receive safe harbor contributions. This prohibition does not apply to an otherwise permissible change under either eligibility service crediting or entry date rules made for employees who are not currently eligible to receive safe harbor contributions under the plan.
  3. Changing the type of safe harbor plan, for example, from a traditional safe harbor plan to a QACA 401(k) safe harbor plan.
  4. Modifying or adding a formula for determining matching contributions or changing the plan’s definition of compensation used to determine matching contributions if the change increases the amount of matching contributions or adds discretionary matching contributions. However, this prohibition does not apply to a plan making a mid-year change to allow discretionary matching contributions if:
    1. the change is adopted at least 3 months before the end of the plan year;
    2. is made retroactive for the entire plan year; 
    3. and the plan sponsor gives an updated safe harbor notice and election opportunities to all participants.


The additional flexibility under the Notice should help make safe-harbor plans more attractive to some employers that previously were reluctant to adopt them.  However, plan sponsors wishing to make mid-year changes to their plans must be vigilant with respect to the rules for updating the safe-harbor notice to plan participants, as well as seeking professional advice regarding any mid-year modifications they are contemplating making to their plan.

EisnerAmper Trends & Developments - June 2016

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Peter Alwardt

Peter Alwardt is a Partner and the National Tax Leader of Employee Benefit Plans, 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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