front corner of IRS building in Washington D.C. (Photo: Diego M. Radzinschi/THE NATIONAL LAWJOURNAL)

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The IRS has granted additional, albeit temporary,COVID-19-related relief for sponsors of "safe-harbor" 401(k) and403(b) plans — plans that are exempt from one or both of the ADPand ACP nondiscrimination tests.

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Notice 2020-52, which was recently issued, provides temporaryrelief from the current requirements for mid-year amendments tosuch plans, and provides additional clarification regardingmid-year amendments to safe-harbor plans that only affect highlycompensated employees.

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This guidance is welcome relief for plan sponsors who feel thefinancial need to reduce or suspend employer contributions underthese plans, but who may not be able to satisfy the currentregulatory requirements for mid-year amendments.

Background

Employee deferrals, whether pre-tax contributions or designatedRoth contributions, to 401(k) plans generally must satisfy theAverage Deferral Percentage (ADP) test, which compares the averagedeferral rate of non-highly compensated employees (NHCEs) to theaverage deferral rate of highly compensated employees (HCEs).

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If the average deferral rate of the HCEs is too high (ascompared to the NHCE deferral rate), the plan must either (i)refund "excess" employee contributions to HCEs, or (ii) makeadditional "qualified" employer contributions for NHCEs.

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Similarly, employer matching contributions and employeeafter-tax contributions to 401(k) plans — and 403(b) plansgenerally — must satisfy a similar test, known as the AverageContribution Percentage (ACP) test. If the average contributionrate for HCEs is too high, as compared to the average contributionrate for NHCEs, the plan must either (i) refund (or forfeit) the"excess" contributions to HCEs, or (ii) make additional "qualified"employer contributions for NHCEs.

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Plan sponsors can avoid the ADP test or the ACP test — or both —by structuring their 401(k) (or 403(b)) plans as "safe-harbor"plans, whether the "traditional" 401(k) safe harbor or the"qualified automatic contribution arrangement" or "QACA," generallyrequire the employer to (i) make employer matching or non-electivecontributions (i.e.. "safe-harbor contributions") of some minimumpercentage of compensation with specific vesting requirements, and(ii) provide a "safe harbor" notice prior to the first day of theyear.

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A safe harbor plan generally must be in place by the first dayof the plan year and remain in place for the entire plan year.

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The 401(k) regulations provide a limited exception to thegeneral rule that safe-harbor plans cannot be amended to change theamount of employer "safe-harbor" contributions in the middle of aplan year.

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Under this exception, the plan sponsor must provide asupplemental notice at least 30 days before the effective date ofthe suspension or reduction, and the plan must satisfy the ADPand/or ACP tests, as applicable, for the entire plan year using the"current year" testing method.

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However, such mid-year amendments may only be made if theemployer either (i) is "operating at an economic loss" (asdescribed in Section 412 of the Code) for the plan year, or (ii)previously included in the plan's safe-harbor notice a statementthat the plan may be amended during the plan year to reduce orsuspend safe harbor contributions.

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In addition, the reduction or suspension cannot be effectiveuntil the later of (i) 30 days after the supplemental notice isprovided, or (ii) the date the amendment is adopted.

Temporary suspension of mid-year amendment requirements

In Notice 2020-52, the IRS notes that because of the ongoingCOVID-19 pandemic many employers are facing unprecedented financialchallenges, and may need to reduce or suspend safe-harborcontributions in order to satisfy payroll or other operatingcosts.

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However, the IRS also recognizes that many employers may beuncertain whether they are "operating at an economic loss" asdefined in the regulation, and/or may not have foreseen the need toinclude the requisite caveat in the plan's safe-harbor notice,warning participants that safe-harbor contributions may be reducedmid-year.

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The IRS also notes that employers may have difficulty satisfyingthe timing requirements for providing the supplemental notice,regarding the reduction or suspension of safe-harborcontributions.

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Under the relief set forth in the Notice, if an employer adoptsan amendment reducing or suspending safe-harbor contributionsbetween March 13, 2020, and August 31, 2020, the plan need notsatisfy the requirement that the employer either (i) is operatingat an economic loss for the plan year, or (ii) provided therequisite "maybe not" statement as part of the safe-harbor noticethat was distributed prior to the 2020 plan year.

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In addition, if the plan satisfies the safe-harbor requirementswith non-elective safe harbor contributions (rather than matchingcontributions), the plan sponsor need not provide the supplementalnotice at least 30 days before the reduction or suspension, so longas (i) the supplemental notice is provided no later than August 31,2020, and (ii) the plan amendment is adopted no later than theeffective date of the reduction or suspension.

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However, there is no relief from the timing requirements for thesupplemental notice for plans that make safe-harbor matchingcontributions, as the level of matching contributions may directlyaffect an employee's salary deferral decisions.

Amendments that affect only HCEs

The Notice also clarifies that a mid-year amendment that onlyreduces (or suspends) contributions for HCEs is not considered a"reduction or suspension of safe-harbor contributions," and istherefore not subject to the requirements discussed above,regardless of when the amendment is adopted.

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However, such an amendment is still a "mid-year" change to theplan's safe-harbor notice content for purposes of IRS Notice2016-16 (the IRS's most recent guidance on mid-year amendments tosafe-harbor plans that do not involve a suspension or reduction ofsafe-harbor contributions), and therefore an updated safe harbornotice and an election opportunity must be provided to HCEs to whomthe mid-year change applies.

Impact of the SECURE Act

Section 103 of the SECURE Act eliminated the safe-harbor noticerequirement for plans that satisfy the safe-harbor requirement withnon-elective, rather than matching, contributions.

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Notice 2020-52 does not address the impact of Section 103 of theSECURE Act. In a footnote, the IRS specifically states that theguidance in Section III of the Notice, which clarifies therequirements for amendments that only affect HCEs, does not addressthe impact of the SECURE Act's elimination of the noticerequirement for non-elective safe harbor plans.

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Additional guidance from the IRS would be helpful to understandhow the statutory elimination of the safe-harbor notice requirementfor plans making non-elective safe-harbor contributions will impactmid-year amendments to such plans.

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Rob Browning is ofcounsel at Spencer Fane LLP in the firm's Overland Park, Kansasoffice.

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