The Internal Revenue Service (IRS) issued Notice 2020-52 on June 29, 2020, making it temporarily easier for employers to suspend or reduce matching contributions and nonelective contributions to safe harbor 401(k) plans mid-year.
As described in our earlier blog post, the Internal Revenue Code of 1986, as amended (the “Code”) imposes rules that limit the ability of employers to suspend or reduce safe harbor matching contributions and safe harbor nonelective contributions, in the middle of a plan year, to a plan that is intended to be a safe harbor plan under sections 401(k) or 401(m) of the Code (such a plan referred to below as a “safe harbor plan”). Notice 2020-52 eases several of those restrictions for a limited period of time in recognition of the ongoing economic effects of the COVID-19 pandemic. The relief also applies to plans subject to section 403(b) of the Code that apply section 401(m) safe harbor rules.
First, if the plan amendment reducing or suspending safe harbor matching contributions or safe harbor nonelective contributions is adopted between March 13, 2020 and August 31, 2020, and is adopted before the reduction or suspension takes effect, then it is not required that the employer either be operating at a financial loss for the plan year or have previously provided information to eligible employees about a possible suspension or reduction in its pre-plan year safe harbor notice.
Second, the employer is not required to distribute a supplemental notice to eligible employees at least 30 days prior to the suspension or reduction of safe harbor nonelective contributions, as long as the supplemental notice is provided no later than August 31, 2020, and the timing requirements for adopting the amendment, as described immediately above, are satisfied.
Note that if safe harbor matching contributions (as opposed to nonelective contributions) will be suspended or reduced, an employer is still required to provide the supplemental notice to eligible employees at least 30 days before the effective date of the reduction or suspension, and the eligible employees must be given a reasonable period of time to change their elective deferral elections under the safe harbor plan prior to the effective date of the reduction or suspension of the matching contributions.
Some of the usual restrictions on mid-year changes in safe harbor contributions continue to apply. Regardless of whether the safe harbor contributions being suspended or reduced are matching or nonelective contributions, the safe harbor plan must satisfy the requirements for being a safe harbor plan for the period of the plan year that occurs prior to the date the safe harbor contributions are reduced or suspended. Also, the plan amendment must provide that the plan will satisfy the average deferral percentage and average contribution percentage (ADP and ACP) nondiscrimination tests for the entire plan year in which the suspension or reduction occurs, using the current year testing method. Of course, the plan must actually satisfy that requirement in operation.
Notice 2020-52 also clarifies that contributions made on behalf of highly compensated employees, as defined in section 414(q) of the Code (HCEs), are not safe harbor contributions; thus a mid-year reduction in the contributions made on behalf of HCEs is generally not subject to the restrictions on reductions or suspensions of safe harbor matching or nonelective contributions (apparently not just in the period of the COVID emergency, but in normal times), provided that the reduction applies only to HCEs. Nevertheless, where such mid-year changes for HCEs affect the content of a pre-plan year safe harbor notice distributed to them, an updated safe harbor notice and election opportunity must be provided to them.