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IRS Addresses SECURE Act Changes Affecting Safe Harbor Plans



IRS Notice 2020-86 (Dec. 9, 2020)

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The IRS has issued Notice 2020-86 to answer frequently asked questions about the SECURE Act’s provisions affecting safe harbor plans (see our Checkpoint article). Section 102 of the SECURE Act raised the maximum deferral percentage for plans using the safe harbor for qualified automatic contribution arrangements (QACAs) from 10% to 15%. Section 103 of the Act eliminated the annual notice requirement for plans that provide safe harbor nonelective contributions and extended the deadline for amending a plan to provide for safe harbor nonelective contributions that are at least 4% of compensation. All three changes are effective for plan years beginning after 2019. Like the IRS’s previous SECURE Act guidance (see our Checkpoint article), Notice 2020-86 addresses only select issues as the IRS develops its regulations under the Act. Highlights include the following:

  • Contribution Cap. Plans are not required to raise their maximum automatic elective deferrals to the 15% level. A plan that incorporates the current 10% cap by reference can continue to impose the 10% cap but must be amended to expressly reference the cap by the extended deadline for SECURE Act amendments (discussed in Notice 2020-68, see our Checkpoint article), retroactive to the first day of the first plan year beginning after 2019. Plan amendments to retroactively increase the cap to more than 10% (but not more than 15%) generally must also be adopted by the same deadline. After that deadline, amendments to increase the cap must be adopted by the deadline generally applicable to discretionary amendments.
  • Annual Notices. While the SECURE Act eliminated the safe harbor notice obligation for plans relying on nonelective contributions to satisfy either ADP safe harbor, plans that also make matching contributions and want to rely on the “traditional” ACP safe harbor under Code § 401(m)(11) for those contributions still have a safe harbor notice obligation. Plans using nonelective contributions to satisfy the QACA safe harbor, however, may make matching contributions and rely on the QACA safe harbor under Code § 401(m)(12) for those contributions without a safe harbor notice obligation. Elimination of the safe harbor notice obligation does not affect other obligations under the Code, such as the requirement to give notice if the plan permits employees to withdraw automatic elective deferrals within 90 days after those deferrals begin.
  • Midyear Suspensions. Notices that a plan may be amended midyear to reduce or suspend safe harbor nonelective contributions—which generally must be included in a safe harbor notice—will not fail to comply because no safe harbor notice is required, provided that the notice otherwise satisfies the requirements for a safe harbor notice. For the first plan year beginning after 2020, these notices are considered timely if given by the later of 30 days before the beginning of the plan year or January 31, 2021. Employers that amend their plans to reduce or suspend safe harbor nonelective contributions but then change their minds may readopt safe harbor nonelective contributions for the entire year and use the safe harbor for the entire year.
  • Extended Amendment Deadline. The new retroactive amendment requirements for plans that adopt a safe harbor design with a 4% nonelective contribution supersede the current regulations for (1) either ADP safe harbor (traditional or QACA), and (2) the QACA ACP safe harbor for matching contributions. But the new rules do not supersede the current regulations for plans using the traditional ACP safe harbor for matching contributions, because (as noted above) that safe harbor is still subject to the pre-SECURE Act safe harbor notice requirements. Retroactive amendments to satisfy the post-SECURE Act ADP safe harbor nonelective contribution requirements may be further delayed to the extent permitted by the SECURE Act’s amendment provision, which generally allows retroactive amendments if adopted by the last day of the first plan year beginning on or after January 1, 2022 (2024 for governmental and collectively bargained plans). The extended deadline for retroactively adopting safe harbor nonelective contributions of at least 4% of compensation does not affect when the employer may deduct those contributions: To be deducted in the prior year instead of the year they are contributed, contributions must be made by the due date of the employer’s tax return for the prior year (including extensions).

EBIA Comment: These FAQs illustrate how seemingly simple statutory provisions can trigger a host of practical compliance questions. The IRS has asked for comments on this guidance and any other aspects of the SECURE Act’s safe harbor provisions as it prepares more comprehensive regulations. Comments are due by February 8, 2021. For more information, see EBIA’s 401(k) Plans manual at Sections XXII (“Nondiscrimination: ADP and ACP Safe Harbor Plan Designs”) and XXVII.E (“Amendment Timing”).

Contributing Editors: EBIA Staff.

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