Safe harbor mid-year amendments

[Belgarath]

I'm violating my "don't try to make sense out of it" policy here, because I'm just curious if anyone knows.

Safe harbor plan with basic matching formula. Suppose they want to do a mid-year amendment to exclude some compensation. Assuming all proper notice, etc. is observed, this is possible. Yet, according to IRS Notice 2016-16, an amendment to the definition of compensation if it would INCREASE the match is generally impermissible, unless it is effective for the entire plan year.

Curious as to the reasoning, if anyone knows.

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).2
2

[Kevin C]

Suppose they want to do a mid-year amendment to exclude some compensation. Assuming all proper notice, etc. is observed, this is possible.

Is this what you meant to say? If so, I would disagree that it is possible to amend mid-year to exclude some compensation from the SH compensation definition. Excluding compensation would reduce the SH contribution, which triggers the rules in 1.401(k)-3(g).

As for the new ability to amend to increase the match, I think that was done in response to constant requests that we should be allowed to do so. Requiring it to be retroactive so that it applies for the entire plan year should make it more difficult to game the system. It also makes sure all participants are treated the same for the plan year, even if they terminated before the change was made. Regardless of the reason, those are the conditions they put on being able to amend to increase the safe harbor formula during the year.

[Belgarath]

But in a match situation, since the advance notice provides an opportunity to increase deferrals on the non-excluded compensation, is this really a reduction in the safe harbor contribution? If it were a non-elective contribution, I'd totally understand that.

And rethinking this and re-reading the notice, I think you are right. Apparently I was asleep at the switch.