The Internal Revenue Service has issued Notice 2020-52 to clarify the requirements that apply to a mid-year amendment of a safe harbor 401(k) plan that reduces only contributions made on behalf of highly compensated employees (HCEs). The notice also provides temporary relief in connection with the ongoing coronavirus pandemic from certain requirements that would otherwise apply to a mid-year amendment to a safe harbor 401(k) plan adopted between March 13, 2020, and August 31, 2020, that reduces or suspends safe harbor contributions.

Background

Contributions or benefits provided under a qualified retirement plan must not be discriminatory in amount in favor of HCEs. 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 with respect to deferrals and the actual contribution percentage (ACP) test with respect to matching and after-tax contributions. As an alternative to satisfying these tests, a plan may satisfy certain safe harbor requirements.

In general, the safe harbor provisions must be adopted before the first day of the plan year and remain in effect unchanged for an entire 12-month plan year. However, the regulations provide for certain permitted changes if the employer is operating at an economic loss for the plan year or has included in the plan’s safe harbor notice 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. In Notice 2016-16, the IRS provided guidance on other mid-year changes.

Effect of the Pandemic

As a result of the pandemic, many employers are facing unexpected financial challenges and may need to reduce or suspend contributions under their safe harbor plans in order to satisfy payroll and other operating costs. One option that an employer maintaining a safe harbor plan may be considering is to reduce plan contributions made on behalf of HCEs. However, an employer may be uncertain as to whether an amendment that reduces only contributions made on behalf of HCEs is subject to the conditions for reducing or suspending safe harbor contributions in the regulations. An employer may also be considering reducing or suspending a plan’s safe harbor matching contributions or safe harbor nonelective contributions. However, an employer may be uncertain as to whether it is operating at an economic loss for the plan year, or the employer may not have foreseen the need to have included a statement in the plan’s safe harbor notice that safe harbor contributions may be reduced mid-year.

Reducing Safe Harbor Contributions for HCEs

The guidance notes that contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. Accordingly, a mid-year change that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions. 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. Therefore, in order to satisfy the notice and election  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.

Reductions or Suspensions

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, the guidance provides that the plan will not be treated as failing to satisfy the requirement that the employer either is operating at an economic loss for the plan year or has included a statement regarding a potential reduction or suspension of contributions in the plan’s safe harbor notice for the plan year.

Furthermore, 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, the plan will not be treated as failing to satisfy the safe harbor requirements merely because a supplemental notice is not provided to eligible employees at least 30 days in advance. However, this treatment applies only if (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. This relaxed notice requirement does not apply to an amendment that reduces or suspends safe harbor matching contributions.