Sponsors of safe harbor workplace retirement plans now have greater latitude in making mid-year plan amendments, thanks to recent guidance from the Internal Revenue Service.
Safe harbor plans are not required to institute the non-discrimination testing required of typical 401(k) and defined contribution plans.
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The new guidance specifies the types of mid-year plan changes that can be made that will not jeopardize safe harbor status.
Prior to the guidance, sponsors of safe harbor plans were allowed to make mid-year changes under limited conditions.
But most mid-year plan amendments were thought to cause a sponsor to lose safe-harbor status, and therefore discouraged sponsors from implementing changes, according to analysis in a client brief from attorneys in Drinker Biddle's employee benefits practice group.
Notice 2016-16 clarifies that mid-year amendments can be made so long as they are not prohibited and participants are given adequate notice, typically 30 days, of what changes are being implemented.
So just what is prohibited going forward? The IRS notice lays out changes and provides a set of examples.
Notwithstanding the new latitude, sponsors will not be able change the amount of vested time workers will need to qualified for plan participation.
Nor will sponsors be able to reduce the number of participants that qualify for participation in a safe harbor plan.
And sponsors will not be able to make changes to matching contributions, including increases, unless the amendment is adopted at least three months prior to the end of the play year, is made retroactive for the entire plan year, and has been documented in an updated safe harbor notice to plan participants.
Also, sponsors will be prohibited from changing a traditional safe harbor plan to a qualified contribution arrangement safe harbor plan in mid-year.
Under Department of Labor regulations, sponsors of safe harbor plans are required to make contributions, which can come in two forms.
The first form requires a matching contribution of 3 percent of a workers salary and another 50 percent of what employees defer, with a cap at 5 percent of a salary deferral.
The second, non-elective approach is for an employer to contribute 3 percent of salary to accounts for all eligible employees, regardless of whether they contribute themselves.
In both cases, the contributions are immediately vested.
Several Employee Retirement Income Security Act attorneys championed the changes.
"When circumstances change during the plan year, many employers have found themselves in a quandary of not being able to change their plans—even when the change may have been advantageous to the participants or the change did not adversely affect the required provisions of the safe harbor plan design," wrote Lori Oliphant, an attorney with Winstead in its Dallas-based employee benefits practice.
The IRS is welcoming additional comments to the guidance. The comment period will be closed April 28, 2016.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
