Mid-Year Safe Harbor Design Changes in a COVID-19 World

As COVID-19 continues its upheaval of practically all points of life, retirement plan administration included (see a few of our prior discussions right here, right here, right here and right here), the Inner Income Service lately issued steerage offering further aid for the sponsors of sure plans. IRS Discover 2020-52 clarifies necessities for mid-year adjustments to a protected harbor 401(okay) plan that solely reduces contributions made on behalf of extremely compensated staff (HCEs), and supplies non permanent aid from sure necessities that may in any other case apply when a plan sponsor chooses to scale back or droop protected harbor contributions throughout a plan 12 months.

Contributions and advantages supplied beneath a certified retirement plan should not discriminate in favor of HCEs. Sure checks should be run on a plan yearly —the Precise Deferral Proportion (ADP) and Precise Contribution Proportion (ACP) checks—to substantiate {that a} plan is non-discriminatory. Sponsors might as an alternative select to design their plan as a “protected harbor” plan by offering matching or nonelective contributions to non-HCEs beneath sure formulation specified beneath the protected harbor guidelines. By doing so, a plan is mostly deemed to cross the ADP and ACP checks. Generally, the protected harbor provisions of a plan should be adopted earlier than the primary day of a plan 12 months and should stay in place for the complete 12-month interval that follows. If a sponsor does want to make adjustments throughout a plan 12 months—particularly, amending the plan to scale back or droop the protected harbor contributions—they have to both be working at an financial loss or have included language of their annual protected harbor discover {that a} discount or suspension might happen mid-year with 30 days’ advance discover.

The IRS acknowledges, nevertheless, that many plan sponsors are going through sudden and unprecedented monetary hardship this 12 months in mild of COVID-19. Sponsors might not know but whether or not they’re working at an financial loss for the 12 months and/or might not have included the requisite language concerning potential adjustments of their most up-to-date protected harbor notices. Sponsors may have issue satisfying the timing necessities for suspending protected harbor contributions when doing so instantly is important to make sure they’ll meet their payroll and different monetary obligations.

Due to these issues, Discover 2020-52 clarifies {that a} mid-year modification solely decreasing contributions to HCEs shouldn’t be a protected harbor contribution change (as protected harbor contributions by definition are solely made to non-HCEs), although an up to date protected harbor discover remains to be required. As well as, a plan could also be amended to scale back or droop protected harbor contributions between March 13, 2020, and August 31, 2020, with out requiring financial loss or language within the annual protected harbor discover permitting such a mid-year change. Such an modification, concerning nonelective contributions solely, may be made with out 30 days’ advance discover, so long as the modification is efficient on a potential foundation and an up to date protected harbor discover is supplied no later than August 31, 2020. (Thirty days’ advance discover remains to be required for adjustments to protected harbor matching contributions as these contributions might immediately have an effect on the quantity a participant chooses to defer.)

The aid beneath Discover 2020-52 additionally applies to protected harbor 403(b) plans.