Mid-year changes to safe-harbor plans

[Peter Gulia]

Many practitioners had suggested (including at the February 2015 Baltimore conference) that some kinds of mid-year changes should be recognized as sufficiently benign that the change ought not to disrupt an otherwise good safe-harbor treatment.

So what do you think of Notice 2016-16?

https://www.irs.gov/pub/irs-drop/n-16-16.pdf

Does this do enough to meet the concerns practitioners had expressed?

[Tom Poje]

It accomplishes at least the one thing that wasn't in the regs, namely, the issuance of a new safe harbor notice.

I've noted that before, how can you change something without being able to issue a new notice.

[Bird]

I might have to re-read it a few times but it seems that the prohibited changes are pretty much limited to SH type contributions.

It will be interesting to read how the tight-panties group sees it.

[austin3515]

I agree. Great job IRS! Credit where credit is due! They took off the handcuffs for sure. They applied reason and equity.

[Earl]

It is a good thing. Now if they would just get off their high horse about applying forfs to SH contributions we would have something.

[Bird]

ASPPA will no doubt take credit for fixing this "problem" that wasn't really a problem.

[justanotheradmin]

I like the notice.

I do have two things that I would want clarified, maybe the great minds here can shed some light.

First Item

"Example 2:

The employer sponsoring Plan N, a traditional §401(k) safe harbor plan, makes a mid-

year plan amendment to decrease safe harbor nonelective contributions from 4% to 3% for all eligible employees. If the reduction meets the requirements of §1.401(k)- 3(g), the plan is no longer a safe harbor plan and is required to satisfy ADP testing or other nondiscrimination standards. If the reduction does not

meet the requirements of § 1.401(k)- 3(g), the plan as amended does not satisfy §401(k)(3)."

The last two sentences seem oddly worded to me. So if the decrease complies with the regs, its subject to ADP etc. If the decrease doesn't comply with the regs, well the plan doesn't pass ADP? At all? I think it should have been more specific, and said §401(k)(3)©, Otherwise, if the entire section of §401(k)(3) isn't satisfied, it sounds like it is deeming the plan to fail ADP, regardless of deferral percentages.

I think I am reading too much into that example, and being too technical. This is only guidance after all. It is not a new rule or regulation.

Second Item

I wish one of the examples had addressed a profit sharing method allocation change. One of the most regular requests I see is to change from pro-rata to individual groups (new comp / Xtest). For a non-safe harbor plan, if participant haven't met the allocation conditions, (last day employ, 1,000 hours etc) sure, we draft the amendment. For safe harbor plans, the conservative position was to make it apply only on a future plan year.

All of the examples where the change was allowed seemed to involve minor changes, and clearly benefit the NHCE. an allocation change to New Comp (in the small plans I work with) is almost always done to benefit the HCE. It is not done to benefit the NHCE.

The notice does not create (nor could it) a new requirement that mid-year changes benefit NHCE. Given that the profit sharing allocation method would be a significant change, I wonder if there might still be some practitioners hesitate to allow such a change mid-year.

I think moving forward I will treat such a request similar to the same way I would treat it from a non-SH plan. check if participants will have met allocation conditions, if not, give 30 days notice, do the amendment.

Thoughts?

[Kevin C]

The last two sentences seem oddly worded to me. So if the decrease complies with the regs, its subject to ADP etc. If the decrease doesn't comply with the regs, well the plan doesn't pass ADP? At all? I think it should have been more specific, and said §401(k)(3)©, Otherwise, if the entire section of §401(k)(3) isn't satisfied, it sounds like it is deeming the plan to fail ADP, regardless of deferral percentages.

This is straight from the final regs. It actually says the plan fails to satisfy 1.401(k)-1(b). SH plans are not allowed to contain language that provides for ADP testing if there is a problem with the SH. So, an improper amendment means you fail to satisfy a qualification requirement. I've heard a number of speakers say an improper amendment ruins your SH status, but all along, the regs have said the consequence is plan disqualification.

Your profit sharing provision change issue is addressed. It says:

Other applicable law also may affect the permissibility of mid-year changes, including, for example, § 411(d)(6) (anti-cutback restrictions), § 401(a)(4) (nondiscrimination restrictions), and § 1.401(k)-1(b)(3) (anti-abuse provisions).

[justanotheradmin]

The last two sentences seem oddly worded to me. So if the decrease complies with the regs, its subject to ADP etc. If the decrease doesn't comply with the regs, well the plan doesn't pass ADP? At all? I think it should have been more specific, and said §401(k)(3)©, Otherwise, if the entire section of §401(k)(3) isn't satisfied, it sounds like it is deeming the plan to fail ADP, regardless of deferral percentages.

This is straight from the final regs. It actually says the plan fails to satisfy 1.401(k)-1(b). SH plans are not allowed to contain language that provides for ADP testing if there is a problem with the SH. So, an improper amendment means you fail to satisfy a qualification requirement. I've heard a number of speakers say an improper amendment ruins your SH status, but all along, the regs have said the consequence is plan disqualification.

Other applicable law also may affect the permissibility of mid-year changes, including, for example, § 411(d)(6) (anti-cutback restrictions), § 401(a)(4) (nondiscrimination restrictions), and § 1.401(k)-1(b)(3) (anti-abuse provisions).

I wasn't thinking of an improper amendment that pre-planned for a SH failure. Though that is a good reminder that they aren't allowed.

I was curious about failure to comply with some other part of 1.401(k)-3(g). Say the notice requirement, or the original notice didn't have the supplemental language and the employer isn't operating at a loss. I guess I'm playing devil's advocate. I would hate to think disqualification would be on the table for something like imperfect notice. But I don't know.

[ERISA newbie]

Good afternoon,

I have a question on the new Safe Harbor plan guidance. Sorry it's my first time posting and I don't know how to start a new thread. A mid-year change to the definition of compensation used to determine matching contributions that increases the amount of matching contributions is prohibited (section IIID). Does that imply that changing the definition of compensation midyear which reduces the matching contribution is allowed?

I've seen the rules about reducing or suspending a safe harbor match, but in my case the company isn't reducing its match for example, from 4 to 3%, it's changing the definition of compensation which would likely result in a reduced match.

Any help would be appreciated.

Thanks!

[justanotheradmin]

A couple of thoughts:

1. I'm going with any changes that touch the SH aren't allowed, unless they are to INCREASE that specific type of SH. i.e. going from 3% NEC to 4% NEC

2. So the reduction in considered compensation, would NOT be allowed since it affects the SH Match

3. You could do the reduction, make sure to comply with the mid-year discontinuance of SH rules, but the plan would no long be SH for this year.

Secondary Issues - to consider for making the compensation change effective NEXT YEAR

A. What definition of compensation are you hoping to use? Is §414(s) compensation testing required?

B. Would the §414(s) Test Pass?

C. Who would be affected by the change? If only NHCE there likely is a discrimination issue

[Kevin C]

Good afternoon,

I have a question on the new Safe Harbor plan guidance. Sorry it's my first time posting and I don't know how to start a new thread. A mid-year change to the definition of compensation used to determine matching contributions that increases the amount of matching contributions is prohibited (section IIID). Does that imply that changing the definition of compensation midyear which reduces the matching contribution is allowed?

I've seen the rules about reducing or suspending a safe harbor match, but in my case the company isn't reducing its match for example, from 4 to 3%, it's changing the definition of compensation which would likely result in a reduced match.

Any help would be appreciated.

Thanks!

You are mis-reading III D

4. A mid-year change (i) to modify (or add) a formula used to determine

matching contributions (or the definition of compensation used to determine matching contributions)

if the change increases the amount of matching contributions, or (ii) to permit discretionary

matching contributions. However, this prohibition does not apply if, at least 3 months prior to the

end of the plan year, the change is adopted and the updated safe harbor notice and election

opportunity are provided, and if the change is made retroactively effective for the entire plan

year (which may require a plan that provides for periodic matching contributions as described in §§

1.401(k)-3©(4) and (5)(ii) and/or 1.401(m)-3(d)(4) to be amended to provide for matching

contributions based on the entire plan year).

If you meet the requirements listed in III D 4, a mid-year change in the SH compensation definition that increases matching contributions is now allowed. A mid-year change in the SH compensation definition that reduces the match is still prohibited by 1.401(k)-3(e)(1) and 1.401(m)-3(f)(1).

[ERISA newbie]

Thanks so much Kevin C and and Justanotheradmin!