As described in our prior update on considerations for 401(k) plan sponsors in the context of the COVID-19 pandemic, safe harbor 401(k) plans are somewhat limited in their ability to reduce or suspend matching or non-elective employer contributions during the middle of a plan year. A new IRS ruling offers more flexibility for employers who may need to make changes.
Generally, to make such a change, (1) the employer must be operating at an economic loss for the year, or (2) the annual safe harbor notice provided to participants must have included a disclosure that the employer could amend the safe harbor contributions during the plan year. In addition, the employer must notify plan participants at least 30 days in advance of the modification to the amount of the safe harbor contributions (the Supplemental Notice).
IRS Notice 2020-52
In response to the potential hardships on employers caused by the COVID-19 pandemic, on June 29, 2020 the Internal Revenue Service (IRS) issued Notice 2020-52 (the Notice) to provide temporary relief from these requirements. Under the Notice, employers are able to reduce or suspend safe harbor matching or non-elective contributions without operating at an economic loss and without having reserved the right to amend safe harbor contributions during the plan year in the annual safe harbor notice, as long as the mid-year amendment is adopted between March 13, 2020, and August 31, 2020.
Furthermore, if an amendment to a safe harbor non-elective contribution is made between March 13, 2020, and August 31, 2020, the employer will be treated as having timely provided the Supplemental Notice as long as (1) the Supplemental Notice is provided no later than August 31, 2020, and (2) the plan amendment is adopted before the effective date of the reduction or suspension to the safe harbor non-elective contribution. Note that the Supplemental Notice relief is only applicable to non-elective contribution amendments, as, in the view of the IRS, delayed notices to changes in matching contributions would impact an employee’s elective deferral decisions.
Clarification on Reducing Contributions for Highly-Compensated Employees
The Notice also clarifies that, because contributions made on behalf of highly-compensated employees (HCEs) are not considered safe harbor contributions, plan sponsors are able to reduce contributions to HCEs and continue contributions to non-HCEs without losing the plan’s safe harbor status. A plan sponsor would, however, be required to provide an updated safe harbor notice to the HCEs for whom the change applies.
Takeaway for Employers
Many employers are facing unexpected financial challenges in 2020 as a result of the COVID-19 pandemic and may be considering alternatives to reduce costs. The Notice offers relief for employers who have already modified their safe harbor plan contributions in light of the pandemic, or that want to change their safe harbor contributions before August 31, 2020. To the extent that an employer is not operating at an economic loss or failed to anticipate a need to reserve the right to reduce safe harbor contributions in its annual safe harbor notice, the employer can make such mid-year changes without jeopardizing the tax-qualified status of the plan. In addition, the Notice confirms that employers can reduce contributions on behalf of HCEs and still retain the plan’s safe harbor status. This relief should be attractive for employers considering a change to their safe harbor contributions during this difficult time.
If you have any questions about this legal update, please reach out to the MMM Employee Benefits & Executive Compensation Team.