The IRS recently issued Notice 2020-52 providing flexibility to employers wishing to reduce or suspend safe harbor contributions to safe harbor 401(k), 401(m) and 403(b) plans in light of the economic and business challenges posed by the ongoing COVID-19 pandemic. Importantly, employers must act by Aug. 31, 2020.
Note that this alert is the fifth in a series of McGuireWoods client alerts relating to COVID-19 and employee benefits. Previous installments include the following:
- COVID-19 and Employee Benefits #1: The Impact on Group Health Plans (March 24, 2020)
- COVID-19 and Employee Benefits #2: CARES Act (April 1, 2020)
- COVID-19 and Employee Benefits #3: Considerations for Compensation Committees (May 4, 2020)
- COVID-19 and Employee Benefits #4: IRS Releases New CARES Act Guidance (June 25, 2020)
In recent years, 401(k) and 403(b) plans that provide a “safe harbor” employer contribution have become very popular. The primary advantage of safe harbor status is that the plan is deemed to satisfy certain time-consuming and costly nondiscrimination tests as to employee salary deferrals and employer matching contributions. This “automatic pass” of the nondiscrimination tests also means highly compensated employees (HCEs) can maximize their salary deferrals to the plan each year, regardless of what non-HCEs choose to defer.
To receive this automatic pass, a traditional safe harbor plan must meet a number of specific requirements, including minimum employer contributions, immediate vesting and annual participant notice requirements. The participant notices must be provided within a reasonable time before each plan year, outlining the participants’ rights and obligations under the plan.
Generally, safe harbor plan provisions must be adopted before the beginning of the plan year and must remain in effect for the entire year. However, Treasury regulations permit an employer to amend its plan midyear to suspend or reduce future safe harbor matching or nonelective contributions if certain requirements are satisfied and the employer either (1) is operating at an economic loss for the plan year, or (2) included a statement in the plan’s safe harbor notice issued at the beginning of the plan year that the plan may be amended during the year to reduce or suspend safe harbor contributions and that such reduction or suspension will not apply earlier than 30 days after all eligible employees are provided a supplemental notice explaining the reduction or suspension (collectively, the economic loss or initial notice requirements).
Temporary COVID-19 Relief for Reductions or Suspensions of Safe Harbor Contributions
IRS’ Notice 2020-52 provides the following relief to employers wishing to reduce or suspend safe harbor contributions:
- If a plan amendment reducing or suspending safe harbor matching or nonelective contributions is adopted between March 13, 2020, and Aug. 31, 2020, then the plan will not be treated as failing to satisfy the economic loss or initial notice requirements.
- If a plan amendment reducing or suspending safe harbor nonelective contributions is adopted between March 13, 2020, and Aug. 31, 2020, then the plan will not be treated as failing to satisfy the applicable rules if the otherwise-required supplemental notice is not provided to eligible employees at least 30 days before the reduction or suspension is effective, provided (1) the supplemental notice actually is provided to eligible employees by Aug. 31 and (2) the plan amendment is adopted no later than its effective date. Note: The IRS excluded this part of the relief from applying to the midyear reduction or suspension of safe harbor matching contributions because (unlike nonelective contributions) matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions.
- Note: The IRS excluded this part of the relief from applying to the midyear reduction or suspension of safe harbor matching contributions because (unlike nonelective contributions) matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions.
Clarification of Requirements for Reducing Contributions for HCEs
In addition to the temporary relief discussed above, Notice 2020-52 clarifies the extent to which the conditions for reducing or suspending safe harbor contributions apply when the amendment reduces contributions only on behalf of HCEs. Specifically, such an amendment is not considered a suspension or reduction of safe harbor contributions requiring an employer to satisfy the applicable rules. However, the amendment would constitute a change to a plan’s required safe harbor notice content. Thus, employers wishing to suspend or reduce contributions only for HCEs must (based on previous IRS guidance) provide updated safe harbor notice and election opportunities to the HCEs affected by the amendment.
The temporary relief provided in Notice 2020-52 should make the reduction or suspension of safe harbor contributions more attractive for safe harbor plan sponsors looking for ways to cut costs and navigate the unexpected financial challenges posed by the COVID-19 pandemic. Without such relief, for instance, an employer may be uncertain as to whether it is operating at an economic loss for the plan year. In addition, due to the unexpected nature of the pandemic, an employer might not have foreseen a need to include a statement in its annual safe harbor notice that safe harbor contributions may be reduced.
As mentioned above, amendments taking advantage of this relief must be adopted by Aug. 31, 2020. Safe harbor plan sponsors interested in changing the safe harbor contributions offered under their retirement plan before the end of the year should carefully review Notice 2020-52. For further information about the notice, please contact the author or any other member of the McGuireWoods employee benefits team.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.