Mid year change to Safe Harbor matching plan - with a twist

[Belgarath]

Safe Harbor matching plan - standard matching formula - plan definition of compensation EXCLUDES bonuses. Now they want to amend to include bonuses in compensation for the 2020 plan year.

From IRS Notice 2016-16, under the 'prohibited changes" section:

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(c)(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).

Now, here's the twist. They are making this change because 2 HCE's already received bonuses early in the year. They may or may not pay bonuses to everyone else at the end of the year. At the time this amendment is made, it seems it would be discriminatory on its face, but, if they pay bonuses at the end of the year to the NHC employees, then subject to compensation testing, it could pass.

Edit - of course, after thinking about it a bit, I now realize that it isn't a matter of compensation testing - if bonuses are INCLUDED, then there isn't any compensation testing for 414(s). I am concerned, however, that a mid-year amendment changing the definition of compensation when it benefits only HCE's in this situation is a nondiscrimination issue. Thoughts?

[Luke Bailey]

The test under 1.401(a)(4)-5(a) is facts and circumstances, which of course doesn't help much, and I don't think any of the examples under 1.401(a)(4)-5(a) are really on point. But in this case, the amendment will presumably be for future years as well, and does not take away anything from any NHCE, so absent some really bad fact/circumstances (like paying less in bonuses to NHCEs after the amendment),  I would think you are OK if you are within Notice 2016-16.