ASPPA recommends relaxing restrictions on mid-year amendments of safe harbor 401(k) plans

The American Society of Pension Professionals & Actuaries (ASPPA) has recommended that the IRS relax the current limitations on mid-year amendments of safe harbor 401(k) plans to allow modifications that would effectively expand plan participation and ease plan administration, without affecting participants’ deferral decisions or endangering the qualified status of the plans.

Restriction on mid-year amendments

A plan will generally not satisfy the ADP test safe harbor or the ACP test safe harbor for a plan year unless the plan year is 12 months long. In addition, under IRS Reg. §1.401(k)-3(e)(1), the safe harbor provisions of the plan must be adopted before the first day of the plan year and remain in effect for the entire 12-month plan year.

IRS Reg. §1.401(k)-3(e)(1) has been generally interpreted by the IRS as prohibiting mid-year amendments of the plan. Limited exceptions have been authorized, enabling sponsors to amend a plan mid-year to: (1) provide for Roth contributions and hardship withdrawals and (2) add in-plan Roth rollovers before December 31, 2011. However, beyond the limited exceptions, operational concerns of sponsors of safe harbor plans that arise mid-year may not be addressed through plan amendments until the following year. Amendments to the plan would only be effective at the beginning of the plan year.

The IRS has expressed concern that certain mid-year plan amendments could affect the plan’s safe harbor obligations and/or a participant’s decision regarding whether to defer or the amount to defer. However, ASPPA notes that the broad prohibition of mid-year payments prevents the modifications to the plan that are unlikely to impact an individual participant’s deferral decisions, but would benefit the plan and all participants. In asking the IRS to narrow the limitation on mid-year amendments, ASPPA has identified several modifications that could be allowed during the year without endangering a plan’s safe harbor status.

Addition of new group of participating employees

Plan sponsors seeking to extend the availability of an existing plan to a new group of participants during the plan year typically do so incident to an acquisition of the stock or assets of a new entity. Sponsors that cannot amend their safe harbor plans during the year to expand availability are left with the unpalatable options of: (1) denying coverage for newly acquired and other affected employees for the balance of the year, or (2) adopting a new plan to cover the affected parties for the termination year (with a merger of the new plan into the existing safe harbor plan at the first of the next year).

Accordingly, ASPPA recommends that the IRS allow sponsors to adopt amendments to open a safe harbor plan up to an expanded group of employees during the plan year. Such amendments could: (1) liberalize eligibility requirements for the class of employees participating in the plan, or (2) permit the mid-year adoption of the plan by a related or acquired entity (provided the safe harbor notice requirements for mid-year entrants are satisfied).

Cessation of safe harbor contributions for HCEs

Plan sponsors may exclude HCEs from eligibility for safe harbor nonelective and matching contributions (IRS Reg. §1.401(k)-3(b)(1)). In addition, safe harbor plans may, under prescribed conditions, be prospectively amended to suspend safe harbor matching contributions during the plan year for all employees. However, plan sponsors are not allowed to prospectively eliminate employer contributions for HCEs only, as such a partial suspension of contributions is not authorized by the Code or regulatory guidance.

In order to redress this situation, ASPPA recommends that the IRS clarify that the suspension or elimination of safe harbor contributions for HCEs is permissible, if the conditions of IRS Reg. §1.401(k)-3(g) and Proposed Reg. §1.401(k)-3(g)(1)(ii), governing the elimination of safe harbor contributions for all employees, are satisfied. The elimination of such contributions, ASPPA advises, would have the added benefit of effectively making the plan less discriminatory.

Amendments to secure plan qualification

Legislative or regulatory changes may require plan language to be amended, effective during the middle of the year. In addition, individually designed plans commonly require remedial amendments to be adopted as part of the favorable determination letter program that must be adopted within a certain period of the issuance of the letter, typically mid-year.

Accordingly, ASPPA recommends that the IRS approve mid-year modifications to plan documents needed to maintain the plan’s qualified status. Thus, remedial amendments adopted in relation to favorable determination letter applications, or a plan restatement to comply with the plan’s 5- or 6-year remedial amendment cycle, would not violate the prohibition on mid-year amendments.

Amendments affecting rights and contributions other than those related to safe harbor deferrals

ASPPA recommends that the IRS clarify that mid-year amendments that do not violate Code Sec. 411(d)(6) or affect the language of the safe harbor notice will not result in a violation of IRS Reg. §1.401(k)-3(e)(1). Pursuant to this suggestion, employers could adopt mid-year amendments to:

1. add or remove life insurance;

2. add or remove a participant loan program, or modify an existing loan policy;

3. allow participant direction of the investment of all nonelective contributions;

4. modify valuation frequency;

5. allow rollovers or modify existing rollover policy;

6. change frequency of deferral elections;

7. add catch-up contribution provisions;

8. reduce the plan’s normal retirement age;

9. change the plan’s definition of disability; and

10. allow immediate distributions to alternate payees in QDROs.

Administrative amendments that do not offset plan operations

ASPPA suggests that the IRS allow mid-year amendments that do not affect the operations of the plan. Such amendments would cover identifying informational details about the plan sponsor or adopting employer (e.g., address, telephone numbers, taxable year of the sponsor, name of plan and plan trustees). This information may be included in the plan document, but, ASPPA notes, is not necessary for the operation of the plan. Thus, mid-year amendments addressing such information would not affect the operation of the plan or adversely impact plan participants.

Source: ASPPA Letter to Joyce Kahn, Acting Director, EP Rulings and Agreements, Internal Revenue Service, October 17, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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