Can a Safe Harbor 401 plan change eligibility during the year?

[wcj99]

A Safe Harbor 401k plan had a 12 month eligibility requirement, then mid-year amended the plan to reduce the eligibility to 3 months. Was this permissible, and if not, how is this corrected?

[John Feldt ERPA CPC QPA]

Some would argue it's okay, others that it's not okay. The IRS has the authority to issue guidance on this (ever since the Treasury Department gave them that authority in November 2013). So, instead of having to go through a long arduous regulatory process, they can issue IRS announcements notices, revenue procedures, etc. on safe harbor plan mid-year amendments. Since that time, no official guidance has been issued by the IRS.

Look at treasury regulations 1.401(k)-3 and see if you think that regulation is specifically prohibiting what the employer did with their amendment - is it in there? Also look at the 2012 ASPPA Annual Conference Q&A where the IRS national office gave some un-official responses to changes to safe harbor plans. In one Q&A, they said if a safe harbor plan is amended to expand eligibility, that's okay as long as the other participants are not affected. Not official guidance, of course, but perhaps that tells us their approach to their interpretation of 1.401(k)-3 (or maybe it does not).

[WCC]

I did not see John's response before I posted this but I agree with him:

Below is from Relius: http://www.relius.net/news/TechnicalUpdates.aspx?ID=1004 See the comment from 2012 national conference, as well as the disclaimer.

Announcement 2007-59. The IRS announced that a plan sponsor could amend a safe harbor 401(k) plan to:
· Add a Roth deferral feature
· Change the hardship provision to add an option to make a hardship distribution on account of medical expenses, college expenses and funeral expenses for a plan beneficiary.

Notice 2010-84. The IRS announced that a plan sponsor could amend a safe harbor 401(k) plan to add an in-plan Roth rollover mid-year as long as the amendment was adopted by December 31, 2011 (the In-plan Roth rollover was effective September 27, 2010).

ASPPA National Conference. In the 2012 National Conference, the IRS verbally confirmed some additional mid-year amendments with which they would feel comfortable:
· Change of plan year, so long as the following plan year the plan followed the safe harbor rules
· Expand coverage to include employees previously not included (so long as existing participants are not affected)
· Change of investment vendor
· A retroactive corrective amendment to address a coverage failure
· Change of trustee

Although a practitioner may not rely on the IRS statements, some practitioners have used the statements to justify at least some mid-year amendments.