Tell Me Something Good: IRS Eases Restrictions on Mid-Year Changes to Safe Harbor Contributions

by Brenda Berg

The IRS has eased the restrictions on mid-year changes to safe harbor contributions, in response to the hardships caused by the coronavirus pandemic.

Employers are generally not allowed to reduce or suspend safe harbor matching or nonelective contributions mid-year unless either (1) the annual safe harbor notice included a statement that the employer could amend the plan mid-year to reduce or suspend the safe harbor contribution, or (2) the employer can demonstrate that it is operating at an economic loss during the plan year. Even if the employer satisfies one of these requirements, the employer must provide a 30-day advance notice before the effective date of the suspension. The suspension of the safe harbor contribution will also mean that the plan becomes subject to nondiscrimination testing for the current plan year.

The new IRS Notice 2020-52 recognizes that many employers are facing unexpected financial challenges during the COVID-19 pandemic and may need to reduce or suspend safe harbor contributions in order to satisfy payroll and other operating costs. Given the unexpected nature of the current crisis, the IRS noted that employers may not have included the mid-year reduction and suspension language in annual notices and they might not yet know whether they are operating at an economic loss. Amid these circumstances, employers could also have difficulty satisfying the 30-day advance notice requirements.

In response, Notice 2020-52 waives the annual notice/economic loss requirements, and allows an employer to amend the plan to reduce or suspend safe harbor matching or nonelective contributions as long as the employer adopts the amendment no later than August 31, 2020. If the employer is changing a safe harbor matching contribution, then the employer still must give an updated safe harbor notice to participants at least 30 days before the effective date of the change. However, if the employer is changing a safe harbor nonelective contribution, the employer may make the change effective immediately. The Notice also gives relief to any employers who made this change as early as March 13, 2020.

Finally, the Notice clarifies that an employer can reduce or suspend contributions for highly compensated employees at any time, as those contributions are not considered to be safe harbor contributions (but this would still require a revised safe harbor notice).

It is important to note that if the employer changes the contributions so that they no longer meet the safe harbor minimum contribution requirements, then regular ADP/ACP nondiscrimination testing will apply to the plan for the year of the change. A failed test could result in refunds to highly compensated employees or other corrections.