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IRS Clarifies Permissibility Of Mid-Year Changes To Safe Harbor Plans

The IRS clarified in Notice 2016-16 that mid-year changes to safe harbor plans and safe harbor notices are permissible under Code Sections 401(k) and 401(m), provided that the applicable notice and election opportunity conditions are satisfied and the mid-year change is not specifically prohibited by the Notice. The Notice prohibits the following mid-year changes:

  • Increasing the number of completed years of service required for an employee to have a nonforfeitable right to the employee’s account balance attributable to safe harbor contributions under a QACA
  • Reducing the number or otherwise narrow the group of employees eligible to receive safe harbor contributions
  • Changing the type of safe harbor plan
  • Modifying (or adding) a formula used to determine matching contributions if the change increases the amount of matching contributions, or to permit discretionary matching contributions

Additionally, the following mid-year changes are not subject to the Notice and would violate the safe harbor regulations, unless the applicable regulatory conditions corresponding to each specified change are satisfied:

  • Adoption of a short plan year or any change to the plan year (permitted only as described in §§ 1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)(2), (3) and (4)
  • Adoption of safe harbor plan status on or after the beginning of the plan year (permitted only as described in §§ 1.401(k)-3(f) and 1.401(m)-3(g))
  • Reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status (permitted only as described in §§ 1.401(k)-3(g) and 1.401(m)-3(h))

This announcement alleviates concerns of a blanket prohibition on mid-year changes to safe harbor plans. The Notice is effective for mid-year changes made on or after January 29, 2016.

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