Mid-Year Change for 401(k) Safe Harbor

[Transplant]

Client would like to change the compensation definition to exclude bonus pay (which they pay at year-end) and have not paid for 2025.

 

The plan is Basic Safe Harbor Match, based on the IRS guidance (2016-16) in part, a mid-year change of the compensation definition for matching contributions is allowable if the definition change is made retroactive for the entire plan year and satisfies notification requirements.   The types of changes discussed "The Change in compensation must not be retroactive in a way that would reduce benefits. For example, if the change excludes certain types of compensation (like bonuses), it must be applied consistently to the entire plan year and cannot retroactively affect contributions already made." per the client they make bonus contributions at the end of year and to date have not made bonus payments in 2025.

 

Legal resource states this would be reduction in benefit and if an amendment was made that Safe harbor status would be lost for the year.   Thoughts?

[justanotheradmin]

Is 2025 a typo? Are you asking if 2025 Safe Harbor Match benefits can be reduced?

What is the plan's definition of compensation? Is it W-2 based? 
If yes, then there is no cutback for 2025 because the final compensation for 2025 is already done. 
Excluding bonus for 2025 would have no affect if no bonus was paid during the calendar year. 

Unless perhaps there was a bonus paid in Jan 2025 that was for work performed in 2024. In that case, I agree, not allowed because its a cutback. 

Any amounts paid now, in 2026 would appear on a 2026 W-2. Even if for work performed in a prior year. 

Could you clarify? 

Are you proposing amending now for 2026? To exclude any bonus paid in 2026? 
Does the plan have a 12/31 year end? Or a different plan year end? 

[Transplant]

My apologies, yes that was a typo.  This is all pertaining to 2026.

Client would like to change the compensation definition to exclude bonus pay (which they pay at year-end) and have not paid for 2026. 

Compensation definition is W-2 wages, with no exclusions.  The plan year end is 12/31

[CuseFan]

What is the bonus practice of the employer? Even if allowed in form via a current amendment, you should verify that excluding bonuses would not result in a discriminatory definition. For example, if bonuses are across the board but HCEs are already at or near the 401(a)(17) maximum compensation such that little to none of their bonuses are excluded in practice, that could very well prove discriminatory.

[Abby N]

I just created a discussion for a similar question.  Did anyone have further thoughts, or did this get resolved?

Also, in the Honorable Transplant's original post, he included the following quote: ""The Change in compensation must not be retroactive in a way that would reduce benefits. For example, if the change excludes certain types of compensation (like bonuses), it must be applied consistently to the entire plan year and cannot retroactively affect contributions already made."
 

Where did this quote come from?  I couldn't find it in the Notice, is it from something else?

[justanotheradmin]

I don't know where that quote comes from. But changes in compensation that INCREASE safe harbor match aren't even generally allowed unless very specific parameters are met. I don't see how changes in the plan's definition of compensation to decrease the safe harbor match are permitted if they affect the NHCE. 
https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-plans-or-safe-harbor-notices
"

Prohibited mid-year changes

The Notice provides the following list of “prohibited mid-year changes” that may not be made to a safe harbor plan, unless the change is required by applicable law or court decision.

• A mid-year change increasing the years of service for the vesting schedule for a safe harbor plan consisting of a Qualified Automatic Contribution Arrangement (QACA);
• A mid-year change to reduce or narrow the group of employees eligible to receive safe harbor contributions; however, this does not limit the ability of the employer to amend a plan mid-year to change eligibility service crediting rules or entry date rules for employees who have not yet become eligible to receive safe harbor contributions;
• A mid-year change to the type of safe harbor, for example, a change from a traditional safe harbor to a QACA, or vice versa;
• A mid-year change 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 to permit discretionary matching contributions. However, a plan may make such a mid-year change if:
  1. the change is adopted at least 3 months before the end of the plan year,
  2. the change is made retroactive for the entire plan year, and
  3. the plan sponsor gives an updated safe harbor notice and additional election opportunities to each employee otherwise required to be provided a safe harbor notice at least 3 months prior to the end of the plan year.

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