February 16, 2016
What? You Can Now Change a Safe Harbor Plan Mid-Stream?
Every year, throughout the year, we would have the same conversation with clients regarding their Safe Harbor 401(k) Plan. “Can we just make a small change now to the plan, maybe an improvement here or there?” Unfortunately, most of the time, we would have to say “no”.
Safe Harbor regulations were enacted specifically to afford plan sponsors relief from many testing issues, the ADP test being the most critical, and required them to highlight, in an annual notice, the features that made their plan a Safe Harbor design. The rationale was simple; the Safe Harbor Notice provides participants a road map to make an informed salary deferral election for the upcoming plan year. If you changed the road map mid-year, in any way, that could be considered discriminatory to the non-highly compensated employees.
Just a few years ago the IRS loosened up its hold on this iron clad rule by allowing termination of a plan’s safe harbor status mid-year when the firm was faced with a large financial burden. Even then, participants would need to be given 30 day notice of this “conversion” to a traditional 401(k) plan design.
But the biggest change to date just happened this past January. The IRS is now allowing modifications to a firm’s Safe Harbor design, in some circumstances, as long as it is accompanied by a 30-day notice (when practical). The following is a brief summary of what is and is not permitted. While there are some definite don’ts the dos are more open to interpretation.
Permitted:
- Increasing the nonelective employer contribution (e.g., going from 3% to 4% – it would need to be retroactive to the beginning of the plan year)
- Increasing the safe harbor match (e.g., matching on 5% versus 4% – must occur prior to 3 months before the end of the year), making it retroactive to beginning of plan year and basing match on full year’s compensation
- Changing entry dates (e.g., monthly to quarterly) for those not yet eligible to enter the plan
- Adding an in-service withdrawal feature, adding a loan feature, etc.
- Change in the QDIA (Qualified Default Investment Alternative)
- Adding an auto enrollment feature
Prohibited:
- Increasing the matching formula or adding a discretionary match on a go forward basis only
- Changing the definition of compensation that determines the match
- Increasing years of service to enter the plan
- Adding restrictions as to who is eligible to participate
- Changing from a traditional safe harbor design to a QACA (a plan with auto entry and auto escalation of a participant’s deferral percentage)
So for the very first time, January 2 and beyond no longer means your client is “stuck” for the remainder of that plan year with their current safe harbor design.
To learn more whether your client’s 401(k) Safe Harbor Plan could/should be amended mid-plan year:
Email us at: Info@BenefitPractice.com or call us toll-free at: (855) 738-9778
