n-16-16.pdf

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Notice 2016-16

Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices

I. PURPOSE

This notice provides guidance on mid-year changes to a safe harbor plan under
§§ 401(k) and 401(m) of the Internal Revenue Code. The notice provides that a mid-
year change either to a safe harbor plan or to a plan’s safe harbor notice does not
violate the safe harbor rules merely because it is a mid-year change, provided that
applicable notice and election opportunity conditions are satisfied and the mid-year
change is not a prohibited mid-year change, as described in the notice. In addition, the
notice requests comments on additional guidance that may be needed, in particular with
respect to mid-year changes to safe harbor plans in cases in which a plan sponsor is
involved in a merger or acquisition.

II. BACKGROUND

A. Exemptions from ADP and ACP Testing for Safe Harbor Plans

Under general nondiscrimination rules, benefits under or contributions to a
qualified plan must be nondiscriminatory in amount. Section 401(k) plans satisfy this
requirement if elective contributions made on behalf of highly compensated employees
(“HCEs”) for a year satisfy the actual deferral percentage ("ADP") test. A similar actual
contribution percentage (“ACP”) test applies to matching contributions and employee
contributions pursuant to § 401(m).

As an alternative to satisfying the annual ADP and ACP test, a plan may be
structured to use a safe harbor plan design. For purposes of this notice, a “safe harbor
plan” is a plan that includes a cash or deferred arrangement described in § 401(k)(12)
(traditional § 401(k) safe harbor) or § 401(k)(13) (qualified automatic contribution
arrangement (“QACA”) 401(k) safe harbor), or a matching contribution described in
§ 401(m)(11) (traditional matching safe harbor) or § 401(m)(12) (QACA matching safe
harbor).

For purposes of this notice, §§ 1.401(k)-3 and 1.401(m)-3 are referred to as the
“safe harbor plan regulations.” The safe harbor plan regulations set out requirements
for a § 401(k) or 401(m) plan to be a safe harbor plan, including requirements regarding
contributions, requirements that certain plan provisions remain in effect for a 12-month
plan year (subject to certain exceptions), and requirements regarding the provision of
safe harbor notices.

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B. Safe Harbor Plan Provisions That Must Remain in Effect for Entire
12-Month Plan Year

Section 1.401(k)-3(e)(1) provides that a plan will fail to satisfy the requirements of
§§ 401(k)(12) and 401(k)(13) and § 1.401(k)-3 unless plan provisions that satisfy the
safe harbor plan rules of § 1.401(k)-3 are adopted before the first day of the plan year
and remain in effect for an entire 12-month plan year. It also provides that a safe harbor
plan that includes provisions that satisfy the safe harbor plan rules of § 1.401(k)-3 will
not satisfy the nondiscrimination requirements for § 401(k) plans for a plan year if the
safe harbor plan is amended to change those provisions during the plan year.
Section 1.401(m)-3(f) includes similar provisions for matching safe harbor plans.

The safe harbor plan regulations set out several exceptions to the requirement
that plan provisions satisfying the rules of §§ 1.401(k)-3 and 1.401(m)-3 be adopted
before the first day of the plan year and continue for an entire 12-month plan year.
These include exceptions for (i) a short first plan year, (ii) a change in the plan year, (iii)
a short final plan year, (iv) a delayed adoption of safe harbor plan nonelective
contributions (if notice of this possibility is provided before the beginning of the plan
year), and (v) a mid-year reduction or suspension of safe harbor contributions (which
results in loss of safe harbor plan status). See §§ 1.401(k)-3(e), (f), and (g) and
1.401(m)-3(f), (g), and (h).
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In addition, exceptions to the prohibition against mid-year
amendments may be provided in guidance of general applicability published in the
Internal Revenue Bulletin. See §§ 1.401(k)-3(e) and 1.401(m)-3(f).

C. Safe Harbor Notice Requirements

The notice requirements applicable to traditional § 401(k) safe harbor plans are
satisfied if each employee eligible to participate is given, within a reasonable period
before any year, written notice of the employee's rights and obligations under the
arrangement and the notice meets certain content and timing requirements. See
§ 401(k)(12)(D) and § 1.401(k)-3(d). Sections 401(k)(13)(E) and 401(m)(11)(A)(ii)
impose similar notice requirements with respect to QACA and matching safe harbor
plans. This notice refers to notices provided under these sections as “safe harbor
notices.”

To meet the content requirements, a safe harbor notice must be sufficiently
accurate and comprehensive to inform an employee of the employee's rights and
obligations under the plan, and written in a manner calculated to be understood by the
average employee eligible to participate in the plan. Under the safe harbor plan
regulations, a notice is not considered sufficiently accurate and comprehensive unless

1
Other guidance discussing mid-year changes to safe harbor plans includes: Ann. 2007-59, 2007-25
I.R.B. 1448 (certain hardship withdrawal changes and designated Roth contribution changes);
Notices 2010-84, 2010-51 I.R.B. 872, and 2013-74, 2013-52 I.R.B. 819 (certain designated Roth
contribution changes); and Notice 2014-37, 2014-24 I.R.B. 1100 (certain changes related to same sex
spouses).

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the notice accurately describes certain information specified in those regulations,
including the plan’s safe harbor contributions, any other plan contributions, the type and
amount of compensation that may be deferred under the plan, how to make cash or
deferred elections (including any administrative requirements that apply to the
elections), the plan’s withdrawal and vesting provisions, and specified contact
information. See §§ 1.401(k)-3(d) and 1.401(m)-3(e). In addition to satisfying the
general content requirements for a safe harbor notice, a safe harbor notice for a QACA
must describe certain additional items, including the level of elective contributions that
will be made on the employee's behalf if the employee does not make an affirmative
election and how contributions will be invested. See § 1.401(k)-3(k).

Requirements for providing safe harbor notices on a timely basis are set out in
§ 1.401(k)-3(d). A safe harbor notice generally must be provided within a reasonable
period before the beginning of the plan year. Whether this timing requirement is met is
based on all of the relevant facts and circumstances, but the timing requirement is
deemed to be satisfied if a safe harbor notice is provided at least 30 days (and not more
than 90 days) before the beginning of the plan year. Special timing rules apply for
employees who become eligible during the plan year. These requirements for delivery
of safe harbor notices also apply under § 1.401(m)-3(e). Section 1.401(k)-3(k) provides
additional notice timing rules for QACAs.

D. Election Period after Receipt of Notice

The safe harbor plan regulations provide that a safe harbor plan generally may
limit the frequency and duration of periods in which eligible employees may make or
change cash or deferred elections under the plan, but require that an employee have a
reasonable opportunity (including a reasonable period after receipt of a safe harbor
notice) to make or change an election. For this purpose, a 30-day election period is
deemed to be a reasonable period to make or change a cash or deferred election. See
§§ 1.401(k)-3(c) and 1.401(m)-3(c).

III. GUIDANCE ON MID-YEAR CHANGES TO SAFE HARBOR PLANS AND
NOTICES

A. Overview

Section III.B of this notice provides guidance on mid-year changes to a safe
harbor plan or to a plan’s required safe harbor notice content that do not violate the safe
harbor plan rules in §§ 1.401(k)-3 and 1.401(m)-3. For purposes of this notice, a “mid-
year change” is (i) a change that is first effective during a plan year, but not effective as
of the beginning of the plan year, or (ii) a change that is effective as of the beginning of
the plan year, but adopted after the beginning of the plan year. Also, for purposes of
this notice, “required safe harbor notice content” refers to the information that is required
by the safe harbor plan regulations to be provided in a plan’s safe harbor notice.

Section III.C of this notice sets out special conditions that must be satisfied for a

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mid-year change that alters the plan’s required safe harbor notice content. Not every
mid-year change to a safe harbor plan alters information required to be provided in a
plan’s safe harbor notice (for example, information about a plan’s entry date is not
required to be provided in a plan’s safe harbor notice). Similarly, information required to
be included in a plan’s safe harbor notice can change mid-year even if no change is
made to the safe harbor plan (for example, a change in contact information).

Section III.D of this notice lists prohibited mid-year changes, and section III.E of
this notice provides examples illustrating certain aspects of the guidance provided under
this notice.

B. Mid-Year Changes to Safe Harbor Plans and Notices

A change made to a safe harbor plan or to a plan’s required safe harbor notice
content does not violate the requirements of §§ 1.401(k)-3 and 1.401(m)-3 merely
because the change is a mid-year change, provided that (i) if it is a mid-year change to
a plan’s required safe harbor notice content, the notice and election opportunity
conditions in section III.C of this notice are satisfied, and (ii) the mid-year change is not
described in the list of prohibited mid-year changes in section III.D of this notice.

The following mid-year changes are not subject to the provisions in the first
paragraph of this section III.B, but instead would violate the requirements of
§§ 1.401(k)-3 and 1.401(m)-3 unless the applicable regulatory conditions corresponding
to each specified change are satisfied:

(i) Adoption of a short plan year or any change to the plan year (permitted
only as described in §§ 1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)(2), (3), and (4));

(ii) Adoption of safe harbor plan status on or after the beginning of the plan
year (permitted only as described in §§ 1.401(k)-3(f) and 1.401(m)-3(g)); and

(iii) Reduction or suspension of safe harbor contributions or changes from
safe harbor plan status to non-safe harbor plan status (permitted only as described in
§§ 1.401(k)-3(g) and 1.401(m)-3(h)).

Other applicable law also may affect the permissibility of mid-year changes,
including, for example, § 411(d)(6) (anti-cutback restrictions), § 401(a)(4)
(nondiscrimination restrictions), and § 1.401(k)-1(b)(3) (anti-abuse provisions).

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C. Conditions for Mid-Year Changes to a Plan’s Required Safe Harbor
Notice Content

The notice and election opportunity conditions applicable to mid-year changes to
a plan’s required safe harbor notice content (for purposes of applying the provisions in
the first paragraph of section III.B of this notice) are described in paragraphs 1 and 2 of
this section III.C. This notice does not require any additional notice or election
opportunities for changes to information that is not required safe harbor notice content,
even if that information is provided in a plan’s safe harbor notice. Also, this notice does
not modify the rules governing information required to be included in a plan’s safe
harbor notice.

1. An updated safe harbor notice that describes the mid-year change and its
effective date must be provided to each employee otherwise required to be provided a
safe harbor notice under § 1.401(k)-3(d), 1.401(k)-3(k)(4), or 1.401(m)-3(e), as
applicable, within a reasonable period before the effective date of the change. Whether
this timing requirement is met is based on all of the relevant facts and circumstances,
but this timing requirement is deemed to be satisfied if the updated safe harbor notice is
provided at least 30 days (and not more than 90 days) before the effective date of the
change. If it is not practicable for the updated safe harbor notice to be provided before
the effective date of the change (for example, in the case of a mid-year change to
increase matching contributions retroactively for the entire plan year, as described in
section III.D.4 of this notice), the notice is treated as provided timely if it is provided as
soon as practicable, but not later than 30 days after the date the change is adopted.
For purposes of this section III.C, if the required information about the mid-year change
and its effective date was provided with the pre-plan year annual safe harbor notice, an
updated safe harbor notice is not required.

2. Each employee required to be provided an updated safe harbor notice
under section III.C.1 of this notice must be given a reasonable opportunity (including a
reasonable period after receipt of the updated notice) before the effective date of the
mid-year change to change the employee’s cash or deferred election (and/or any after-
tax employee contribution election). For this purpose, a 30-day election period is
deemed to be a reasonable period to make or change a cash or deferred election. If it
is not practicable for the election opportunity to be provided before the effective date of
the change (for example, in the case of a mid-year change to increase matching
contributions retroactively for the entire plan year, as described in section III.D.4 of this
notice), an employee is treated as having a reasonable opportunity to make or change
an election if the election opportunity begins as soon as practicable after the date the
updated notice is provided to the employee, but not later than 30 days after the date the
change is adopted.

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D. Prohibited Mid-Year Changes

The mid-year changes described in this section III.D are prohibited mid-year
changes (for purposes of the provisions in the first paragraph of section III.B of this
notice). However, a mid-year change described in section III.D.1-4 is not a prohibited
mid-year change under this section III.D if it is required by applicable law to be made
mid-year, such as a change mandated by a statutory law change or court decision.

1. A mid-year change to increase the number of completed years of service
required for an employee to have a nonforfeitable right to the employee’s account
balance attributable to safe harbor contributions under a QACA pursuant to the safe
harbor rules under § 1.401(k)-3(k)(3) or 1.401(m)-3(a)(2).

2. A mid-year change to reduce the number or otherwise narrow the group of
employees eligible to receive safe harbor contributions. This prohibition does not apply
to an otherwise permissible change under eligibility service crediting rules or entry date
rules made with respect to employees who are not already eligible (as of the date the
change is either made effective or is adopted) to receive safe harbor contributions under
the plan.

3. A mid-year change to the type of safe harbor plan, for example, a change
from a traditional § 401(k) safe harbor plan to a QACA § 401(k) safe harbor plan.

4. A mid-year change (i) to modify (or add) a formula used to determine
matching contributions (or the definition of compensation used to determine matching
contributions) if the change increases the amount of matching contributions, or (ii) to
permit discretionary matching contributions. However, this prohibition does not 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 (which may require a plan that
provides for periodic matching contributions as described in §§ 1.401(k)-3(c)(4) and
(5)(ii) and/or 1.401(m)-3(d)(4) to be amended to provide for matching contributions
based on the entire plan year).
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2
As described in section III.B of this notice, adoption of safe harbor plan status on or after the beginning
of the plan year is permitted only as described in §§ 1.401(k)-3(f) and 1.401(m)-3(g) and a mid-year
change to reduce or suspend safe harbor contributions is permitted only as described in §§ 1.401(k)-3(g)
and 1.401(m)-3(h).

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E. Examples

Example 1: The employer sponsoring Plan M, a traditional § 401(k) safe harbor
plan, makes a mid-year plan amendment to increase future safe harbor nonelective
contributions from 3% to 4% for all eligible employees. Employees otherwise required
to be provided a safe harbor notice are provided both an updated notice that describes
the increased contribution percentage and an additional election opportunity in
accordance with section III.C of this notice. The mid-year change does not violate the
provisions of §§ 1.401(k)-3 and 1.401(m)-3.

Example 2: The employer sponsoring Plan N, a traditional § 401(k) safe harbor
plan, makes a mid-year plan amendment to decrease safe harbor nonelective
contributions from 4% to 3% for all eligible employees. If the reduction meets the
requirements of § 1.401(k)-3(g), the plan is no longer a safe harbor plan and is required
to satisfy ADP testing or other nondiscrimination standards. If the reduction does not
meet the requirements of § 1.401(k)-3(g), the plan as amended does not satisfy
§ 401(k)(3).

Example 3: The employer sponsoring Plan O, a traditional § 401(k) and
traditional matching safe harbor plan with a calendar year plan year and match
calculated on a payroll-period basis, makes a mid-year amendment on August 31 to
increase the safe harbor matching contribution from 4% to 5% retroactive to January 1
and to amend the plan to change from a payroll-period match calculation to an entire-
plan-year match calculation. Due to the retroactive effective date of the change, it is not
practicable for the plan to provide an updated safe harbor notice and additional election
opportunity to employees prior to the January 1 effective date. On September 3, the
first date that an updated notice and additional election opportunity can practicably be
provided, employees otherwise required to be provided a safe harbor notice are
provided an updated notice that describes the increased contribution percentage and an
additional 30-day election period starting September 3 in accordance with section III.C
of this notice. The mid-year change does not violate the provisions of §§ 1.401(k)-3 and
1.401(m)-3.

Example 4: The employer sponsoring Plan P, a safe harbor plan, makes a mid-
year amendment to add an age 59 ½ in-service withdrawal feature. Employees
otherwise required to be provided a safe harbor notice are provided both an updated
notice that describes the withdrawal feature and an additional election opportunity in
accordance with section III.C of this notice. The mid-year change does not violate the
provisions of §§ 1.401(k)-3 and 1.401(m)-3.

Example 5: The employer sponsoring Plan Q, a QACA safe harbor plan with
multiple investment options, makes a mid-year change in the plan’s default investment
fund from Fund X to Fund Y. Employees otherwise required to be provided a safe
harbor notice are provided both an updated notice that describes Fund Y as the default
investment fund and an additional election opportunity in accordance with section III.C

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of this notice. The mid-year change does not violate the provisions of §§ 1.401(k)-3 and
1.401(m)-3.

Example 6: The employer sponsoring Plan R, a traditional § 401(k) safe harbor
plan, makes a mid-year amendment to change the design to a QACA safe harbor plan.
Section III.D.3 of this notice prohibits the change. The plan as amended does not
satisfy § 401(k)(3). However, if the employer had made a mid-year amendment to add
an automatic contribution feature (but not an amendment changing the design to a
QACA safe harbor plan) and employees otherwise required to be provided a safe
harbor notice had been provided both an updated notice that described the automatic
contribution arrangement and an additional election opportunity in accordance with
section III.C of this notice, then the mid-year change would not have violated the
provisions of §§ 1.401(k)-3 and 1.401(m)-3.

Example 7: The employer sponsoring Plan S, a safe harbor plan, makes a mid-
year amendment to change the entry date for commencement of participation of
employees who meet the plan’s minimum age and service eligibility requirements from
monthly to quarterly. The amendment also changes plan rules regarding arbitration of
disputes. The amendment is effective with respect to employees who are not already
eligible to participate in the safe harbor plan. The safe harbor notice is not required to
include the plan entry date or information on arbitration procedures; therefore, an
updated notice and additional election opportunity are not required. The mid-year
change does not violate the provisions of §§ 1.401(k)-3 and 1.401(m)-3.

IV. SECTION 403(b) PLANS

Section III of this notice applies on similar terms to § 403(b) plans that apply the
§ 401(m) safe harbor rules pursuant to § 403(b)(12).

V. COMMENTS

Comments are requested on additional guidance that may be needed with
respect to mid-year changes to safe harbor plans. Specific comments are requested as
to whether additional guidance is needed to address mid-year changes relating to plan
sponsors involved in mergers and acquisitions or to plans that include an eligible
automatic contribution arrangement under § 414(w).

Comments may be submitted in writing no later than April 28, 2016. Comments
should be submitted to Internal Revenue Service, CC:PA:LPD:PR (Notice 2016-16,
Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044, or
electronically to Notice.Comments@irscounsel.treas.gov. Please include "Notice 2016-
16" in the subject line of any electronic communications. Alternatively, comments may
be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to
CC:PA:LPD:PR (Notice 2016-16), Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washington, D.C. All comments will be available for
public inspection and copying.

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VI. EFFECTIVE DATE

This notice is effective for mid-year changes made on and after Jan. 29, 2016.

VII. EFFECT ON OTHER DOCUMENTS

Announcement 2007-59 is revoked.

VIII. PAPERWORK REDUCTION ACT

The collection of information contained in this notice has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. § 3507) under control number 1545-2191.

An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.

The collection of information in this notice is in section III of this notice. The
collection of information relates to the updated notice requirements in the case of a mid-
year change. The collection of information is mandatory for those plan sponsors
making these elections.

The likely recordkeepers are businesses and other for-profit institutions and
nonprofit institutions. Currently, it is estimated that any effect on burden, as previously
reported to OMB, will not be significant. Any potential changes on burden will be
reported through the renewal of the current OMB approval number. Estimates of the
annualized cost to respondents are not relevant, because each collection of information
in this notice is a one-time collection.

Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by § 6103.

IX. DRAFTING INFORMATION

The principal author of this notice is Cynthia A. Van Bogaert of the Office of
Associate Chief Counsel (Tax Exempt and Government Entities). For further
information regarding this notice, contact Cynthia A. Van Bogaert at (202) 317-4102 (not
a toll-free call).