Relief has been granted to certain employers who sponsor safe-harbor 401(k) and §403(b) plans to amend their plans in 2020 to reduce certain contributions in Notice 2020-52.[1]  The relief is provided in response to economic issues arising due to the COVID-19 pandemic.

The relief covers two cases:

• An employer makes a mid-year amendment to a safe harbor §401(k) or §401(m) plan that reduces only contributions for highly compensated employees (HCEs); or

• An employer is making certain mid-year amendments to a safe harbor §401(k) or §401(m) plan that reduces or suspends safe harbor contributions.

Safe harbor plans are granted an exemption from meeting the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.  The ADP and ACP tests impose limits on the ability of highly compensated employees (as defined at IRC §414(q)) to make contributions to the plan unless the non-highly compensated employees (NHCE) make sufficient contributions to the plan.

To gain this exemption, the plan must either make a qualifying safe harbor non-elective contribution for all covered employees (whether or not they make any deferral under the plan) or make a qualifying safe harbor matching contribution to the account of each participant that defers under the plan.

Under the law and regulations governing such plans prior to the issuance of this Notice, the plan can only be amended mid-year to reduce the safe harbor contributions if the following conditions are satisfied as outlined in the Notice:

Under § 1.401(k)-3(g)(1)(i)(A) and (ii)(A), the employer must either (1) be operating at an economic loss (as described in § 412(c)(2)(A)) for the plan year, or (2) have included in the plan’s safe harbor notice (as described in § 1.401(k)-3(d)) for the plan year a statement that the plan may be amended during the plan year to reduce or suspend safe harbor contributions and that the reduction or suspension will not apply earlier than 30 days after all eligible employees are provided notice of the reduction or suspension. Under § 1.401(k)-3(g)(1)(i)(C) and (ii)(C), the reduction or suspension of safe harbor contributions may be effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided the supplemental notice described in § 1.401(k)-3(g)(2). Under § 1.401(k)-3(g)(1)(i)(D) and (ii)(D), eligible employees must be given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of safe harbor contributions to change their cash or deferred elections and, if applicable, their employee contribution elections.[2]

The IRS Notice indicates that, due to the economic impact of the pandemic, employers may need to reduce or suspend their safe harbor contributions in order to “satisfy payroll and other operating costs.”[3]

Reduction of Safe Harbor Contributions on Behalf of HCEs Only

One potential option some employers are wishing to implement is described in the Notice as follows:

One option that an employer maintaining a safe harbor plan may be considering is to reduce plan contributions made on behalf of HCEs. However, an employer may be uncertain as to whether an amendment that reduces only contributions made on behalf of HCEs is subject to the conditions for reducing or suspending safe harbor contributions set forth in §§ 1.401(k)-3(g) and 1.401(m)-3(h).[4]

The IRS Notice clarifies that such an amendment that only impacts HCEs will be considered acceptable if proper notice is given.  The Notice provides:

As described in section II.B of this notice, contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. Accordingly, a mid-year change that reduces only contributions made on behalf of HCEs is not a reduction or suspension of safe harbor contributions described in §§ 1.401(k)-3(g) and 1.401(m)-3(h). However, a mid-year change that reduces only contributions made on behalf of HCEs would be a mid-year change to a plan’s required safe harbor notice content for purposes of section III.B of Notice 2016-16. Therefore, in order to satisfy the notice and election opportunity conditions of section III.C of Notice 2016-16, which apply generally to changes that affect required safe harbor notice content and are not reductions or suspensions of safe harbor contributions, an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies, determined as of the date of issuance of the updated safe harbor notice.[5]

Other Reduction or Suspension of Safe-Harbor Contributions

The other option considered by employers for which relief is granted is described in the Notice as follows:

An employer may also be considering reducing or suspending a plan’s safe harbor matching contributions or safe harbor nonelective contributions. However, an employer may be uncertain as to whether it is operating at an economic loss for the plan year and, due to the unexpected nature of the COVID-19 pandemic, the employer may not have foreseen the need to have included a statement in the plan’s safe harbor notice that safe harbor contributions may be reduced mid-year. Further, in light of the COVID-19 pandemic, an employer may have difficulty satisfying the timing requirements for providing notice of reductions or suspensions of safe harbor contributions.[6]

In this case, the IRS offers two different relief provisions.  The net impact of these rules is that plans offering either type of safe harbor contribution option may amend their plans between March 13, 2020 and August 31, 2020 to reduce or suspend such contributions, but those making use of the safe harbor matching contribution option will still need to give 30 days notice to participants before the reduction can take place.

Note, as well, these changes will quite often result in the plan no longer qualifying as a safe harbor plan for 2020.  If that is the case, the plan will be subject to ADP and ACP testing and HCEs may find their contributions to the plan limited.

Temporary Relief Related to Mid-Year Reductions or Suspensions of Safe Harbor Matching or Safe Harbor Nonelective Contributions

All plans will be allowed to make the amendments to reduce or suspend contributions, so long as the amendment is adopted between March 13, 2020 and August 31, 2020:

If a plan amendment that reduces or suspends safe harbor matching contributions or safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirement in §§ 1.401(k)-3(g)(1)(i)(A) and (ii)(A) and 1.401(m)-3(h)(1)(i)(A) and (ii)(A) that the employer either (1) is operating at an economic loss (as described in § 412(c)(2)(A)) for the plan year, or (2) has included in the plan’s safe harbor notice (as described in § 1.401(k)-3(d)) for the plan year a statement that (a) the plan may be amended during the plan year to reduce or suspend the safe harbor contributions and (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.[7]

Temporary Relief Related to the Supplemental Notice Requirement for Mid-Year Reductions or Suspensions of Safe Harbor Nonelective Contributions

Even if an employer satisfied either the economic loss rule or gave notice before the beginning of the year that the plan might be amended to remove or suspend the safe harbor contribution, the regulations also required notice be given to employees when the employer adopted those changes during the year.  This Notice provides relief from the notice requirements, but only for employers using the safe harbor non-elective contribution option.  The relief provides:

If a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirements of § 1.401(k)-3(g)(1)(ii) or § 1.401(m)-3(h)(1)(ii) merely because a supplemental notice is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective, provided that (1) the supplemental notice is provided to eligible employees no later than August 31, 2020, and (2) the plan amendment that reduces or suspends safe harbor nonelective contributions is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.[8]

The IRS provides the following explanation in the Notice for why this relief does not extend to safe harbor matching contribution reductions or suspensions:

This notice does not provide relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions under § 1.401(k)-3(g)(1)(i) or 1.401(m)-3(h)(1)(i) because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions).[9]

Application of the Notice to §403(b) Plans

§403(b) plans can apply the above rules if they meet the following conditions:

Sections III and IV of this notice apply on similar terms to § 403(b) plans that apply the § 401(m) safe harbor rules pursuant to § 403(b)(12).[10]

[1] Notice 2020-52, June 29, 2020, https://www.irs.gov/pub/irs-drop/n-20-52.pdf (retrieved June 29, 2020)

[2] Notice 2020-52, Section II.C

[3] Notice 2020-52, Section II.D

[4] Notice 2020-52, Section II.D

[5] Notice 2020-52, Section III

[6] Notice 2020-52, Section II.D

[7] Notice 2020-52, Section IV.A

[8] Notice 2020-52, Section IV.B

[9] Notice 2020-52, Section IV.B

[10] Notice 2020-52, Section V