On December 9, 2020, the IRS issued Notice 2020-86 (the Notice) providing initial guidance for plan sponsors on the changes made under the SECURE Act for plans that provide for safe harbor nonelective contributions. The IRS notes that the guidance is not intended to be comprehensive and requested public comments on the application of the new rules. Also, note that they have not yet updated the regulations, so there may (and hopefully will) be future changes.
In general, the SECURE Act eliminated the safe harbor notice requirement for plans that provide for safe harbor nonelective contributions, expanded the ability for plan sponsors to retroactively amend their plans to permit safe harbor nonelective contributions, and increased the maximum automatic enrollment percentage from 10% to 15% for QACA safe harbor plans.
The Notice address all the changes to a certain extent, but the following is focused solely on the elimination of the safe harbor notice requirements for plans that provide for safe harbor nonelective contributions. While this change was intended (by Congress) to reduce the administrative burden associated with these types of plans, it has little practical application based on the initial IRS guidance.
Which plans are required to provide the safe harbor notice?
The Notice clarifies that the following plans still must provide the safe harbor notice:
Plans that provide for safe harbor matching contributions (the SECURE Act did not make any changes to the rules applicable to plans that provide for safe harbor matching contributions)
Plans that provide for safe harbor nonelective contributions AND matching contributions intended to satisfy the ACP safe harbor requirements
If a plan provides for safe harbor nonelective contributions, it is exempt from the ADP test.
If the plan also permits matching contributions (fixed or discretionary), the plan must meet certain requirements for the match to be exempt from ACP testing. In general, 401(k) contributions exceeding 6% of compensation cannot be matched, the plan cannot impose allocation conditions on the match, discretionary matching contributions cannot exceed 4% of a participant’s compensation, and the safe harbor notice must be provided.
For example, assume a plan provides for a 3% safe harbor nonelective contribution and permits discretionary matching contributions. Further, assume there are no allocation conditions on the match and the employer matches 66.67% of deferrals up to 6%. While the safe harbor notice is not required for the plan to satisfy the ADP safe harbor requirements, it would be required if the employer wants to meet the requirements for the match to be exempt from the ACP test. In other words, even though the match provided by the employer would otherwise meet the ACP safe harbor requirements, if the employer does not provide the safe harbor notice, the plan would nevertheless be subject to ACP testing for the plan year.
Can a plan that provides for safe harbor nonelective contributions be amended mid-year to reduce or suspend those contributions if the employer did not provide the safe harbor notice?
First, under the existing regulations (which have not been updated for the SECURE Act changes), in order for a 401(k) plan that provides for safe harbor nonelective or safe harbor matching contributions to be amended mid-year to reduce or suspend safe harbor contributions, the employer must (1) be operating at an economic loss, or (2) have provided a notice to participants prior to the beginning of the year stating that the plan may be amended during the year to reduce or suspend contributions (the “maybe not” notice). Note that there are additional conditions that must be satisfied including the requirement to provide 30 days advance notice to participants (allowing them to make changes to their deferral elections). Additionally, the safe harbor contribution must made through the effective date of the amendment, and the plan must satisfy the ADP/ACP tests using the current year testing method for the entire plan year.
Since the SECURE Act generally eliminated the safe harbor notice requirements for plans that provide for safe harbor nonelective contributions, it was anticipated the IRS would also eliminate the “maybe not” notice. Unfortunately, the IRS took the surprising position in Notice 2020-86 that a plan that provides for safe harbor nonelective contributions still must provide the “maybe not” notice if the employer wants to reserve the right to reduce or suspend safe harbor contributions mid-year. The Notice states that while such plans are not required to provide the safe harbor notice, they still must provide a “maybe not” notice (generally, within 30 days prior to beginning of the plan year).
Since it is only a matter of how much language is included in the participant notice, this essentially subjects employers who sponsor safe harbor nonelective contributions plans to the same notice requirements that existed before the SECURE Act. We would expect the IRS will receive many comments on this aspect of the guidance, so there is still hope this issue will be resolved when they update the regulations.
How can I learn more?
When the IRS provides additional guidance or issues the updated regulations, we will provide an update. If you have any questions, please do not hesitate to contact us.