Good News from the IRS on 401(K) Safe Harbor Plans


Safe harbor 401(k) plans are attractive because they are not required to perform annual nondiscrimination testing.  In the past, one of the biggest reasons not to offer a safe harbor 401k) plan was the prohibition on changing certain plan provisions once they were disclosed in the plan's annual safe harbor notice before the beginning of the plan year.  Even if business circumstances dictated a mid-year plan design change, a plan sponsor's hands could be tied.  In mid-February, the IRS liberalized a safe harbor plan's ability to make certain mid-year plan changes, provided two conditions are met and the change is not prohibited.  The new guidance applies to safe harbor plan changes made on or after January 29, 2016.

The following two conditions must be satisfied:

  • The plan sponsor must issue an updated safe harbor notice within a reasonable time frame before the change; and
  • Employees must be given the opportunity to change their deferral elections before the change becomes effective. 

The guidance prohibits the following mid-year plan changes:

  • A change to the matching contribution formula or definition of plan compensation if the change increases the amount of the plan match or permits a discretionary match;
  • A reduction in the number of employees eligible to receive safe harbor contributions;
  • An increase in the number of years of service required to vest in QACA safe harbor contributions; and
  • A change in the type of safe harbor plan offered; i.e., changing from a traditional safe harbor plan to a QACA safe harbor plan.

The impact of the prohibition on mid-year changes to safe harbor plans is felt most often when sponsors of safe harbor plans close mergers or acquisitions during a plan year. The IRS failed to address that issue in this guidance but did request comments on how to address that issue in the future. 

Plan sponsors may wish to consider whether a safe harbor plan could meet their business needs now or in the future given this recent liberalization of the rules relating to mid-year plan changes.