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IRS Offers Temporary Relief for Midyear Contribution Changes Under Safe Harbor Plans



IRS Notice 2020-52 (June 29, 2020)

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In light of the COVID-19 pandemic, the IRS has issued Notice 2020-52, offering safe harbor plan sponsors temporary relief from certain requirements applicable to midyear reductions or suspensions of safe harbor contributions. Notice 2020-52 also clarifies the requirements for midyear contribution reductions (during or after the pandemic) that affect only highly compensated employees (HCEs) participating in a safe harbor plan. IRS regulations generally require a plan’s safe harbor provisions to remain in effect for an entire 12-month plan year and prohibit midyear plan amendments to those provisions. But midyear amendments to reduce or suspend contributions may be permitted if the employer is operating at an economic loss, or if the plan’s notice regarding employee rights and obligations includes a statement that the plan may be amended during the plan year to suspend or reduce safe harbor contributions. Safe harbor plans that are amended to reduce or suspend contributions must also meet other requirements, such as a requirement to provide all eligible employees with a “supplemental notice” explaining the consequences of the amendment, the procedures for changing contribution elections, and the effective date of the amendment.

Notice 2020-52 provides that an amendment to reduce or suspend safe harbor matching contributions or safe harbor nonelective contributions for a plan year will not violate the rule limiting midyear amendments to situations in which the employer is either operating at an economic loss or has included the required statement in the plan’s safe harbor notice, provided the amendment is adopted between March 13, 2020, and August 31, 2020. In addition, plans may be amended (during the same period) to reduce or suspend safe harbor nonelective contributions without providing a supplemental notice at least 30 days prior to the reduction or suspension, so long as the supplemental notice is provided by August 31, 2020, and the amendment is not retroactive. Delayed notices are not permitted for plans reducing or suspending safe harbor matching contributions, because those contributions affect employees’ contribution decisions. Separately, Notice 2020-52 clarifies that contributions made on behalf of HCEs are not considered safe harbor contributions and can be reduced or suspended without regard to the limits on amendments to safe harbor contributions. A reduction or suspension for HCEs would, however, alter content that is required to be included in a plan’s safe harbor notice, so affected HCEs would have to be given an updated safe harbor notice and an opportunity to change their contribution elections.

EBIA Comment: Plan sponsors, some of whom may have already acted in anticipation of this guidance, will welcome this relief, which makes it easier to redirect funds from retirement contributions to other, more urgent needs. Those familiar with the SECURE Act will remember that it eliminated the safe harbor notice requirement for plan years beginning after 2019 for plans that provide safe harbor nonelective contributions (see our Checkpoint article). Notice 2020-52 acknowledges that development but declines to address the SECURE Act’s impact on the discussion of benefit reductions limited to HCEs, leaving some doubt as to whether the notice obligations to HCEs might be further reduced for some plans that rely on nonelective contributions. For more information, see EBIA’s 401(k) Plans manual at Sections XXII.C (“ADP Safe Harbor Plan Design Requirements”), XXII.I (“Plan Document and Amendment Requirements for Safe Harbors”), and XXII.J (“Safe Harbor Notices to Eligible Employees”).

Contributing Editors: EBIA Staff.

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