Many employers offering a retirement plan utilize a safe harbor 401(k) plan for the convenience and level of security afforded to the employer by its use. However, until recently, the IRS has not expressly permitted amendments to be made to safe harbor plans at any time other than prior to the beginning of any given plan year except in limited instances. The absence of express guidance regarding these amendments has led to much uncertainty in the qualified plan world. In IRS Notice 2016-16, the IRS has attempted to clear up any lingering uncertainty and has expressly stated it will now allow employers to adopt mid-year amendments to safe harbor 401(k) plans in most instances.
In general, 2016-16 permits mid-year changes to be made to safe harbor plans except certain prohibited changes. 2016-16 generally requires the following if a mid-year change is desired. First, if a mid-year change affects the required safe harbor notice, the plan must provide participants with an updated safe harbor notice describing the change and its effective date. Second, participants must have a reasonable opportunity after receipt of the notice to change their deferral election. The updated safe harbor notice must generally be given a reasonable time before the change goes into effect. A notice given 30-60 days before the effective date of the change is deemed reasonable. If this is impractical, then a notice provided as soon as practical but no later than 30 days after the change is adopted will suffice.
2016-16 provides much needed flexibility with regard to safe harbor 401(k) plans. Plan sponsors wishing to make changes to existing safe harbor 401(k) plans that were unable to be made previously due to timing issues should consult with their retirement plan advisors to determine if such changes are permitted under 2016-16.