The Internal Revenue Code (IRC) has nondiscrimination requirements for 401(k) retirement plans subject to the annual actual deferral percentage (ADP) test. However, plan sponsors can avoid ADP testing for their 401(k) plan through meeting the requirements for a safe harbor plan. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. A safe harbor plan may include a cash or deferred arrangement (traditional 401(k)), or qualified automatic contribution arrangement (QACA).

Employers sponsoring safe harbor 401(k) plans must satisfy certain notice requirements. Each eligible employee is given notice of his or her rights and obligations under the plan. Until recently, 401(k) plan sponsors were reluctant to make mid-year changes to their safe harbor plans, or to the plan's safe harbor notice. Such a change could potentially violate the IRS's nondiscrimination requirements. However, some mid-year amendments to safe harbor plans will now be okay thanks to recent IRS guidance.

The IRS has issued guidance on the issue of mid-year changes to safe harbor plans with Notice 2016-16. It provides that a mid-year change to a safe harbor plan, or to a plan's safe harbor notice, does not violate the safe harbor rules merely because it's a mid-year change. However, mid-year changes are only permitted if:

• The plan satisfies the notice and election opportunity conditions, if applicable, and
• The change is not a prohibited mid-year change listed in Notice 2016-16.

The safe harbor notice must be provided within a “reasonable time” before the beginning of the plan year, at least 30 days, but not more than 90 days, before the beginning of each plan year. Any mid-year changes to the plan generally need to meet the same “reasonable time” notice requirement. Providing notice of the mid-year changes and the effective date between 30 days and 90 days of the effective date is deemed reasonable. Plan sponsors must also give employees a reasonable amount of time to make changes to their cash or deferral election after receiving notice of the change and before the effective date of the change, with a 30-day election period deemed reasonable.

Examples of permissible mid-year changes, given they meet the notice requirement, include:

• Changes to the plan's default investment fund.
• Changes to the plan's rules for dispute arbitration.
• Increase in future safe harbor non-elective contributions from 3% to 4% for all employees.
• Mid-year changes as required by law.

IRS Notice 2016-16 also gives examples of mid-year changes that would not be permissible. These include:

• Increasing an employee's required number of completed years of service to have a nonforfeitable right to the employee's account balance attributable to safe harbor contributions under a QACA plan.
• Narrowing the group of employees eligible to receive safe harbor contributions.
• Changing the type of safe harbor plan, (such as from a traditional safe harbor plan to a QACA 401(k) safe harbor plan).
• Certain modifications to the formula for determining matching contributions if the change increases the amount of matching contributions, or allows discretionary matching contributions.

If you have any questions about making changes to your 401(k) safe harbor plan, Butterfield Schechter LLP is here to help. We are San Diego County largest law firm focusing its law practice on employee benefits law. Our firm can help you and your business plan for the future, including compliance with changing IRS and ERISA regulations. Contact our office today with any questions on how we can help you and your business succeed.