Temporary Safe Haven for Safe Harbor 401(k) Plans: Relief for Midyear Changes to Safe Harbor Contributions

In response to the unexpected challenges many employers are facing as a result of the COVID-19 pandemic, the U.S. Internal Revenue Service (IRS) and Department of the Treasury (Treasury) are providing temporary relief with respect to midyear reductions or suspensions of safe harbor matching contributions and safe harbor nonelective contributions to safe harbor 401(k) and 401(m) plans (together, safe harbor contributions).

Generally, safe harbor contributions may be reduced or suspended during a plan year only if the employer (1) is operating at an economic loss or (2) previously included a statement in the plan’s annual safe harbor notice, as described in § 1.401(k)-3(d), that safe harbor contributions may be reduced or suspended midyear. Additionally, an amendment that reduces or suspends safe harbor contributions cannot be effective earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided with a supplemental notice, as described in § 1.401(k)-3(g)(2), regarding the reduction or suspension. Recognizing that employers may want to reduce or suspend a plan’s safe harbor contributions, but they may be unsure whether they are operating at an economic loss or may not have foreseen the need to include the necessary statement in the safe harbor notice, the IRS and Treasury issued Notice 2020-52 on June 29, 2020 to give employers additional flexibility.

Safe Harbor Nonelective Contributions

Pursuant to the Notice, a midyear amendment to reduce or suspend safe harbor nonelective contributions will be permitted even if the employer does not meet the otherwise applicable requirements (i.e., employer is operating at an economic loss or previously included a statement in the plan’s safe harbor notice that such contributions may be reduced or suspended) so long as (1) the amendment is adopted between March 13 and August 31, 2020, but no later than the effective date of the reduction or suspension of the safe harbor nonelective contributions and (2) the supplemental notice is provided to eligible employees no later than August 31, 2020.

Safe Harbor Matching Contributions

The notice similarly provides that a midyear amendment to reduce or suspend safe harbor matching contributions will be permitted even if the employer does not meet the otherwise applicable requirements (i.e., employer is operating at an economic loss or previously including a statement in the plan’s safe harbor notice that such contributions may be reduced or suspended) so long as the amendment is adopted between March 13 and August 31, 2020. However, the notice provides no relief with respect to the timing of the supplemental notice for safe harbor matching contributions. Plan sponsors must continue to give eligible employees a reasonable opportunity to change their elections following receipt of a supplemental notice. Accordingly, the earliest that an amendment to reduce or suspend safe harbor matching contributions may be effective continues to be no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the supplemental notice.

Finally, the notice clarifies that where an employer makes a midyear change to a safe harbor 401(k) or 401(m) plan that reduces or suspends only contributions made on behalf of highly compensated employees, a supplemental notice and election opportunity must nevertheless be provided to highly compensated employees affected by the change. 

To discuss these issues in more detail and learn how they may apply to your plan, contact your usual Sidley Austin attorney or the authors listed below.