Mid year SH amendment changing from plan year to per payroll

Please don't waste any research time on this, as it is an academic question that came up tangentially during a general conversation.

SH match plan calculates SH match per plan year. Can it be amended mid-year to change to per payroll calculation/deposit?

I say no. A participant that elected to defer all their 401(k) in the first 3 months would be hurt by this change without any way to fix it.

Thanks Bill. I beg your pardon, I should have included a little more detail re our conversation. Your specific concern was discussed, and one possible option was to amend retroactively to the beginning of the year. The other was to have the amendment prospective, but still do a "true up" on deferrals/compensation up to the effective date of the amendment (say, August 1, for example).

Again, this was just theoretical conversation (we TPA's sure do have some nerdy conversations) so please don't waste any time, but interested in any thoughts you might care to toss out.

Since you asked not to research it, I won't look it up, but if I recall correctly Notice 2016-16 prohibits a mid-year change to reduce the safe harbor formula. Since the change in the way the match is calculated could result in a smaller match for some people I think it would be prohibited.

If the amendment requires the sponsor to true up the match at the end of the year, I think that would be ok. It would in essence just be changing the timing of the contribution, which I don't believe is protected.

1 hour ago, Belgarath said:

Thanks Bill. I beg your pardon, I should have included a little more detail re our conversation. Your specific concern was discussed, and one possible option was to amend retroactively to the beginning of the year. The other was to have the amendment prospective, but still do a "true up" on deferrals/compensation up to the effective date of the amendment (say, August 1, for example).

Again, this was just theoretical conversation (we TPA's sure do have some nerdy conversations) so please don't waste any time, but interested in any thoughts you might care to toss out.

Thanks but how would amending retroactively to the beginning of the year solve the math?

If the goal is to stay safe harbor, then the amendment can't be done mid-year.  If they did the "maybe not" safe harbor notice, they can amend mid-year to change the SH Match from a plan year calculation to strictly payroll-by-payroll.  However, doing so is a reduction in the safe harbor match, which puts you under the rules in 1.401(k)-3(g).   

Since you are talking theoretical, if the plan was safe harbor in the prior year, it can be amended to have a short plan year and start with a payroll-by-payroll match formula at the beginning of the new plan year.  With the short plan year, it isn't a mid-year amendment.  The plan is safe harbor for the short plan year if it satisfies 1.401(k)-3(e)(3). I doubt it would be worth the trouble, but it is possible.

I drafted this before Kevin C's most recent post, so there might be inadvertent overlap.

A reference to making a retroactive amendment to the beginning of the PY might arise from a mis-recall of a statement in Notice 2016-16. If that Notice was applicable to this situation, it would be worth looking at that condition, which requires that certain amendments that would otherwise be prohibited by that Notice can be "saved" if accompanied by a change in the computation period to use the entire PY as the computation period, retroactive to the first day of the PY. However, I don't think that provision applies because I don't think the Notice applies.

Notice 2016-16 prohibits increasing a match midyear and certain other changes, but generally does not address a decrease in the ADP SH formula because that is covered by the regulation. So, the proposed decrease would be a reduction in the promised safe harbor contribution and would require a 30-day advance notice of the amendment reducing the match, and replacing the safe harbor method for the PY with a current-year ADP test requirement for the entire year. The match could be used in that test as a QMAC. (CARES has not changed any safe harbor rule in either the Notice or the regulation.) So YES you can "make the amendment," but you LOSE safe harbor status if you do so. That's a business decision.

If this was not a safe harbor match, I believe such an amendment could be done, but a true-up would be owed for the portion of the PY during which the plan-year computation period was in effect (i.e., the true-up is a protected benefit). Someone who front-loaded their deferrals might still be unhappy, as it would not be a full-year true-up, but I don't see anything prohibiting such a reduction other than the anti-cutback rule, and that rule is satisfied IMHO if the true-up is made for just the portion of the PY that elapses through the later of the adoption date or the effective date of an amendment of this nature.

Thanks all. We'll probably never get such a request from a client, but it is good to keep this in the back of the head if it ever does occur.