On June 29, 2020, the Internal Revenue Service (the “IRS”) issued Notice 2020-52 that provides temporarily relief to plan sponsors that amend their safe harbor Section 401(k) or 401(m) plans (“Safe Harbor Plans”) mid-year to reduce or suspend employer safe harbor matching or nonelective contributions due to the COVID-19 pandemic.  To qualify for the relief, a Safe Harbor Plan would need to be amended between March 13, 2020 and August 31, 2020.

Background

Under current IRS regulations and related guidance, a Safe Harbor Plan may be amended mid-year to reduce or suspend the employer’s safe harbor matching or nonelective contributions only if all of the following requirements are met:

  • The employer either (i) is operating under an economic loss for the year (which is generally a facts and circumstances test), or (ii) included a statement in the original safe harbor notice given to participants before the start of the plan year (“Original Notice”) that the employer may reduce or suspend contributions mid-year and that the reduction or suspension will not apply until at least 30 days after participants are provided notice of the reduction or suspension (“Required Reservation”).
  • All eligible participants are provided with a supplemental notice that explains (i) the consequences of the amendment that reduces or suspends the future safe harbor contributions, (ii) the procedures for participants to change their cash or deferred elections, and (iii) the effective date of the amendment (“Supplemental Notice”);
  • The reduction or suspension of safe harbor contributions is effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the Supplemental Notice;
  • Participants must be given a reasonable opportunity (including a reasonable period after receipt of the Supplemental Notice) prior to the reduction or suspension of safe harbor contributions to change their 401(k) elections;
  • The plan must be amended to provide that the ADP test and the ACP test (if applicable) will be satisfied for the entire plan year using the “current year testing method” (i.e., the plan can no longer use the safe harbor to satisfy such testing for the year); and
  • The plan must make the pre-amendment safe harbor contributions through the effective date of the amendment.

Temporary Relief and Other Guidance Provided Under Notice 2020-52

Due to unprecedented circumstances resulting from the COVID-19 pandemic, Notice 2020-52 provides the following additional temporary relief from the general prohibition on mid-year reductions or suspensions of safe harbor contributions:

  • For a plan amendment adopted between March 13, 2020 and August 31, 2020, a plan will not be treated as failing to satisfy the requirement that the employer either is operating under an economic loss for the year or included the Required Reservation in the Original Notice given to participants.
  • For a plan amendment that reduces or suspends safe harbor nonelective contributions adopted between March 13, 2020 and August 31, 2020, the plan will not be treated as failing to satisfy the requirement that participants be provided the Supplemental Notice at least 30 days prior to the effective date of the reduction or suspension, so long as (i) the Supplemental Notice is provided to participants no later than August 31, 2020, and (ii) the plan amendment is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions. This relief does not apply to mid-year reductions or suspensions of safe harbor matching contributions.
  • The temporary relief described above also will apply on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules to satisfy the nondiscrimination rules applicable to such plans.

Separately, Notice 2020-52 clarifies that, because contributions made on behalf of highly compensated employees (“HCEs”) are not included in the definition of safe harbor contributions, a mid-year change that reduces only the contributions of HCEs is not considered a suspension or reduction of safe harbor contributions that requires an employer to satisfy the rules described above.  However, such a mid-year change would be a change to the content of plan’s Original Notice, and pursuant to prior guidance issued in IRS Notice 2016-16 an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.

Many employers have implemented or are considering changes to their 401(k) plan matching and nonelective contributions in light of the economic situation related to the COVID-19 pandemic. There are a number of considerations with any of these changes and employers should consider them carefully with counsel. IRS Notice 2020-52 provides welcome guidance in this regard for employers considering changes to Safe Harbor Plans.

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Photo of Steven Weinstein Steven Weinstein

Steven D. Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare…

Steven D. Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare plans.

Steven advises clients in all aspects of pension plan tax qualification and plan administration, including drafting of plan documents and employee communications; providing advice relating to corporate acquisitions and mergers; and negotiating investment management agreements, trust agreements, recordkeeping and custodial contracts, and other plan-related contracts.

In the tax-qualified plan area, Steven assists clients concerning the rules relating to discrimination testing, participation, vesting, cash or deferred arrangements, plan limitations and plan distributions. He also counsels clients regarding voluntary correction programs offered by the Internal Revenue Service and Department of Labor.

In addition, he counsels a wide array of clients on issues relating to fiduciary responsibility in connection with the administration and operation of employee benefit programs, particularly with respect to advice relating to the investment of plan assets. The latter advice includes the rules governing investment diversification, determination of plan assets, foreign indicia of ownership, prohibited transactions, and exclusive benefit and prudence. He also advises employers in connection with the implementation of all phases of reduction-in-force programs, including the drafting of severance plans and related documents, as well as employee communications required to effect these programs.

Steven has wide-ranging experience with health and welfare plans, particularly regarding the new rules issued under the Affordable Care Act (ACA). As a member of Proskauer’s interdisciplinary Health Care Reform Task Force, he assists clients and other Firm lawyers in preparing for the numerous changes resulting from ACA.

His experience is extensive in advising Fortune 500 companies with respect to the structure of their benefit plans and how such plans may be affected by corporate transactions. He also regularly counsels plan fiduciary committees as to best procedural practices to reduce potential exposure to fiduciary breach claims. His clients are most frequently in the manufacturing, financial services and entertainment sectors.

Steven has significant experience in assisting clients with the implementation and ongoing operation of non-qualified retirement plans and other types of executive compensation, including issues relating to ERISA coverage, and Section 409A and Section 457A compliance. He also advises clients in connection with executive employment agreements and change-in-control or severance arrangements.