Safe Harbor mid-year amendment

[RLR]

If an employer amends a SH Match mid-year to exclude contributions to HCE’s – leaving it in effect for Non-HCE’s however – is it still subject to ADP/ACP testing for the year of the change?

[buckaroo]

Generally, the IRS position is that changes to a safe harbor 401(k) plan after the beginning of the plan year violate the 12-month plan year rule and the notice requirements. There are some exceptions to the restriction on mid-year amendments, such as for plan termination, adding Roth, amending to addess same sex marriage, and reducing or eliminating match or nonelective contributions, if applicable requirements are met. All of this being said, the IRS generally enforces restrictions on mid-year amendments.

Conservatively, I would think that this would be similar to suspending the SHMAC. In order to reduce or suspend SHMAC, a plan sponsor must provide a supplemental notice to all eligible employees informing them of the reduction or suspension. In addition, the plan sponsor must adopt a plan amendment providing for the reduction or suspension, which cannot be effective earlier than 30 days after the employees are provided the supplemental notice AND that the ADP and ACP tests will apply for the entire plan year using the current year testing method.

[MWeddell]

The rules are in Treas. Reg. Section 1.401(k)-3(g). There you will find that:

• Depending on how the safe harbor notice was worded and whether the employer is operating at an economic loss, the employer may not be permitted to make this change until the plan year ends (in which case you may be researching the rules for a short plan year for a safe harbor planin Treas. Reg. Section 1.401(k)-3(e)).
• If the reduction is permitted, then ADP testing will be required for the plan year.