Mid-Year Safe Harbor 401(k) Plan Changes and Taxes

Relief regarding mid-year amendments to safe harbor 401(k) plans arrived earlier this year with IRS notice 2016-16. The notice provided a short list of prohibited mid-year changes leaving all other mid-year changes available.

This IRS guidance helps plan sponsors comply with safe harbor plan and notice rules when making a mid-year change if:

  • The appropriate notice and election opportunity are provided, typically between 30-90 days.
  • The mid-year change is not a prohibited change.

Permissible Mid-Year Safe Harbor 401(k) Plan Changes Include

  • Increasing future safe harbor non-elective contributions from 3% to 4% for all eligible employees.
  • Adding an age 59 ½ in-service withdrawal feature.
  • Changing the plan’s default investment fund.
  • Altering the plan rules on arbitration of disputes.
  • Shifting the plan entry date for employees who meet the plan’s minimum age and service eligibility requirements from monthly to quarterly.
  • Adopting mid-year amendments required by applicable law (for example, statutory law changes or court decisions).

Prohibited Mid-Year Safe Harbor 401(k) Plan Changes Include

  • Increasing an employee’s required number of completed years of service to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA).
  • Reducing the number of employees eligible to receive safe harbor contributions.
  • Changing the type of safe harbor plan, for example, from a traditional safe harbor plan to a QACA 401(k) safe harbor plan.
  • Modifying a formula for determining matching contributions if the change increases the amount of matching contributions, or permit discretionary matching contributions. A plan isn’t limited if the:
  • change is adopted at least 3 months before the end of the plan year,
  • change is made retroactive for the entire plan year, and
  • plan sponsor gives an updated safe harbor notice and election opportunities at least 3 months prior to the end of the plan year.

We specialize in comprehensive retirement plan services for employers, advisors, and plan participants.

As always your local ABG representative is available to help you with mid-year plan changes and as a resource for any questions you may have.