Amending a safe harbor plan mid-year

Safe harbor contributions enable plans to skip testing for elective deferrals (401(k) plans) and matching contributions (401(k) and 403(b) plans). Effective January 1, 2015, there are uniform rules to suspend or reduce safe harbor matching contributions and safe harbor non-elective (i.e., non-matching) contributions. (1) The safe harbor notice required before the start of each plan year must include a statement that the employer may reduce or suspend contributions mid-year, subject to 30 days advance notice to employees. (2) Employees must receive a 30 day advance notice before any such cut-back. (3) The employer must amend the plan prior to the date of the cut-back. (4) Employees must get a reasonable time to change their elections after being notified of the cut-back. (5) The plan must provide that the normal ADP and ACP testing rules will apply rather than the safe harbor free pass on testing.

Note: an employer operating at an economic loss as described in IRC §412(c) – check with counsel on that – can reduce or cut back safe harbor contributions even if it did not provide the Notice in (1) but follows steps (2) through (5).

A handy chart for many IRS limits

This is an IRS link to various limits for years 2013 through 2015. Remember that highly compensated employees (“HCEs”) are determined based on their compensation in a “look-back year,” not the current year. For example, the IRS chart shows a $120,000 HCE limit in 2015. That will be relevant in 2016 when 2015 is the look-back year for 2016 HCE determinations. For 2015, a person is an HCE based on 2014 earnings and the 2014 limit, which was $115,000. For calendar year plans, the previous calendar year is the “look back year.” For fiscal year plans, the “look back year” will either be the previous plan year or, if elected on a consistent basis for all of an employer’s plans, the calendar year ending in the current plan year.