A few years back, an Internal Revenue Service (IRS) official opined that the IRS would not look favorably on safe harbor 401(k) plan making any amendments mid-year except in some circumstances such changing a trustee, changing a plan vendor., loosening eligibility requirements, and changing a plan year as long as the safe harbor plan year was not affected. There was no guidance on the matter and the people who attended the conference where that official said it were very concerned with the statement. Many read too much into the statement.
While I usually have a Justice Scalia interpretation of the Code, ERISA, and the regulations, some statement by an IRS official at a regional ASPPA conference doesn’t hold much weight with me. I took the position that I would allow amendments to a safe harbor 401(k) mid-year as long as it does not impact the safe harbor formula in place (except as previously allowed by other guidance) or that would restrict the ability to get a safe harbor contribution or increase or implement a discretionary matching contribution. Many third party administrators (TPAs) too a very stringent reading of the IRS official’s statement and stated they wouldn’t even allow a change of the profit sharing contribution formula or even add an in-service distribution at age 59 ½ mid-year. I think it was absolutely preposterous and was hoping for some actual, reasonable IRS guidance.
Common sense came 3 ½ years later in the form of Notice 2016-16 which states which amendments mid-year would not be allowed and safe harbor notice changes that must be made to alert plan participants of any amendments to the safe harbor notice.
Participants need a reasonable time to be alerted to any mid-year changes to the Plan within 30-90 days of the change as well as an opportunity to change their deferral elections before the change is made.
The notice banned these types of mid-year changes:
1) a change to increase the years of service required to fully vest in safe harbor contributions under a Qualified Automatic Contribution Arrangements (QACA) .
2) a change to further restrict the group of employees eligible to receive safe harbor contributions. However, eligibility changes with respect to employees who are not already eligible to receive safe harbor contributions under the plan are allowed (such as loosening eligibility requirements).
3) a change to the type of safe harbor plan.
4) a change to modify (or add) a formula used to determine matching contributions if the change increases the amount of matching contributions. This includes discretionary matching contributions. A limited exception does apply if at least 3 months prior to the end of the plan year, the change is adopted and the updated safe harbor notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year.