Seyfarth Synopsis: Due to the significant economic impact of COVID-19 on businesses, many plan sponsors would like to reduce or suspend contributions to safe harbor 401(k) plans this year. Normally, mid-year changes to safe harbor contributions can only be made in narrow circumstances. In response to employer requests for relief, the IRS has issued Notice 2020-52. The Notice provides relief to plan sponsors who in 2020 want or need to make mid-year amendments that reduce or eliminate safe harbor contributions even if they have not satisfied the current requirements to make such mid-year changes. Similar relief was granted to 403(b) plans.

Under normal circumstances, in order to utilize the nondiscrimination testing safe harbors (which provide for automatic passage of the ADP and ACP tests on employee salary deferral contributions and employer matching contributions respectively), a plan must provide written notice to the participants prior to the beginning of the safe harbor plan year. Recent legislation eliminate the need for the advance notice for one particular type of safe harbor, but that’s besides the point. Under existing rules, once a plan year begins, the safe harbor contribution levels are locked in for the entire year, unless: (a) the plan sponsor suffers an economic loss or (b) the annual safe harbor notice explicitly reserved the right to reduce or suspend safe harbor contributions. Even where one of these standards is met, a related plan amendment must be adopted before the change is effective, a revised safe harbor notice must be distributed at least 30 days before the effective date, and the ADP/ACP Tests also must be passed for the entire plan year.

On June 29, 2020, the IRS released Notice 2020-52. The Notice responds to employer requests for more guidance and flexibility in their ability to change safe harbor contributions during 2020 as a result of unexpected financial losses associated with the current pandemic.

The Notice explains that mid-year reductions in safe harbor contributions to highly compensated employees (“HCEs”) only are not changes that “throw” the plan out of safe harbor status. However, the Notice retains the requirement to provide an updated safe harbor notice at least 30 days prior to the effective date of the change. This gives HCEs an opportunity to change their contribution percentages in light of the new contribution formula. This relief is not limited to the current pandemic, but is of general applicability.

Further, recognizing that plan sponsors may not have anticipated the economic fallout of the pandemic or are having problems distributing revised safe harbor notices timely, the Notice temporarily suspends the normal requirements that either the plan sponsor be suffering an economic hardship or that the plan sponsor has provided a notice before the plan year that allows a for mid-year change, provided that:

  • A plan amendment changing the contributions is adopted between March 13, 2020 and August 31, 2020, but no later than the amendment’s effective date.
  • For plans with safe harbor matching contributions, an updated safe harbor notice is distributed to participants at least 30 days prior to the amendment’s effective date.
  • For plans with safe harbor non-elective contributions, notice is distributed to participants no later than August 31, 2020, explaining the change in contributions – in other words, the notice can be distributed retroactively.

The Notice provides similar relief to 403(b) plans.

Although the Notice gives welcome relief to safe harbor plan sponsors, there continue to be strict deadlines regarding plan amendments (which not only change the contribution formula, but also incorporate annual nondiscrimination testing provisions) and distribution of updated notices. Once safe harbor status is lost, ADP and ACP Tests must be passed for the full 2020 plan year, as applicable.

In addition, you might remember that the SECURE Act that was passed at the end of last year eliminated annual notices for non-elective safe harbor plans. Under those rules, a plan that did not send a non-elective safe harbor notice at the end of 2019 can adopt the non-elective safe harbor at any point during 2020, independent of this new guidance. See our blog post regarding the SECURE Act here 

Please contact us if you would like further information.