IRS Relaxes Safe-Harbor Amendment Restrictions

On January 29, 2016, the IRS published Notice 2016-16, which represented a significant (and welcome) departure from its prior stance on mid-year amendments to safe harbor plans. The old rule of thumb was that such amendments were generally forbidden, with a handful of named exceptions. The new framework essentially reverses that – most kinds of amendments are now permitted, assuming the proper procedure is followed, with only a few types of amendments limited or disallowed by rule. (Of note, this change does not affect prior IRS guidance regarding mid-year adoption of safe harbor provisions for a new 401(k) plan, mid-year plan terminations, plan year changes, or mid-year reduction or suspension of safe harbor contributions.)

For most varieties of mid-year amendment – defined in the Notice as an amendment adopted in the middle of a plan year or retroactive to the beginning of the plan year – there are two requirements in the event of a change to any information in the annual safe harbor notice. First, all participants required to receive the annual notice must be provided with a revised safe harbor notice within a reasonable period of time. Second, all such participants must be given at least a month to revise their elective deferrals within a reasonable period of time. For both of these requirements, “reasonable period of time” is defined to mean at least 30 days prior to the effective date of the amendment when such effective date is in the middle of a plan year, or no later than 30 days after the adoption of the amendment when such effective date is the first day of the plan year. For permissible mid-year amendments to safe harbor plans that do not change any information in the annual safe harbor notice, no notice or elective deferral revision period are required.

Generally speaking, these changes provide employers who sponsor safe harbor plans with significantly more flexibility to tweak in real time what they are providing to their participants. As always, for any specific questions regarding the effect of the new rules on your plan and any potential amendments thereto, you should contact your TPA for assistance.