IRS has granted COVID-19 relief regarding safe harbor 401(k) plans

IRS will permit midyear amendments to plan contribution formulas

Jun 20, 2020
Jun 20, 2020
0 min. read

In response to the economic crisis related to the COVID-19 pandemic, the IRS, in Notice 2020-52 (the Notice), has expanded the ability of employers to reduce or suspend the promised employer matching or other contributions to a safe harbor 401(k) plan. Normally, there are substantial restrictions that limit an employer’s ability to adopt such an amendment in the middle of the plan year. Generally, 401(k) plans have the same plan year as the employer’s tax year, so many plans operate on a calendar year, but a plan year may technically be any 12-month period, and certainly, many plans would have been in the middle of a year when COVID-19 struck.

The Notice expands the ability of an employer to adopt an amendment that:

  • Reduces contributions only for its highly compensated employees (HCEs); or
  • If it meets certain requirements, reduces or suspends safe harbor contributions for all employees.

Safe harbor plans rules in general

Safe harbor 401(k) plans are exempt from the nondiscrimination testing rules that apply generally to employee elective deferrals (the ADP or Average Deferral Percentage Test) and employee after-tax contributions and employer matching contributions (the ACP or Average Contribution Percentage Test).

There are several conditions to qualifying for the exemption. Most important among the conditions is the requirement that either (a) an employer makes a safe harbor nonelective contribution that provides a 3% of pay contribution to all eligible employees (whether or not they elect to defer their own pay) or (b) the plan provides employees with a specified matching contribution. If an employer chooses to make a matching contribution to satisfy the safe harbor requirement, it must issue a safe harbor notice to the employees before the first day of the plan year.

A safe harbor notice must describe the safe harbor contribution the employer will make (i.e. a matching contribution or a nonelective contribution) and several other plan provisions including the definition of compensation, how an employee can elect to defer his or pay, what the plan’s distribution and vesting requirements are, and how the employee may obtain additional plan information.

Midyear amendments

Once the plan year of a safe harbor plan has begun, an employer’s ability to make changes to the terms of the plan is more restricted than in a normal 401(k) plan. IRS regulations refer to such amendments as midyear amendments, and define a midyear amendment as any amendment that is effective during a plan year, but not effective as of the beginning of the plan year or effective as of the beginning of the plan year, but adopted after the beginning of the plan year.

This midyear amendment rule substantially limits an employer’s ability to reduce or suspend the required safe harbor contribution during the plan year. The regulations only permit a suspension of or a reduction in contributions if:

  • The plan sponsor is operating at an “economic loss” or
  • The annual safe harbor notice that the employer issued before the beginning of the plan year included language that notified participants of the possibility that the employer could elect to reduce or suspend safe harbor contributions.

In addition, the employer must adopt a written amendment to the plan’s safe harbor contribution formula and, at least 30 days ahead of the reduction or suspension, the employer must give employees a supplemental notice explaining the consequences of the change, procedures for making new deferral elections and the effective date of the reduction or suspension.

COVID-19 relief for reducing or suspending safe harbor contributions only for HCEs

The Notice points out that any contributions an employer makes for HCEs are not actually safe harbor contributions. However, as these contributions are contributions described in the annual safe harbor notice given to employees, the employer must provide a supplemental notice to those HCEs informing them of the reduction or suspension. The timing of the notice depends on whether the plan uses the safe harbor nonelective contribution method or the safe harbor matching contribution. See the following discussion for those requirements. 

Reductions or suspension of employer safe harbor contributions for all employees 

In the Notice, the IRS acknowledged that an employer might be uncertain as to whether it is operating at an economic loss for the plan year and that an employer may not have included a statement in the plan’s safe harbor notice that it was reserving the right to reduce safe harbor contributions after the year had started. The IRS also recognized that in light of the COVID-19 pandemic, an employer might have difficulty satisfying the timing requirements for providing notice of reductions or suspensions of safe harbor contributions. In this regard, the following applies:

1. Amendment window: If an employer adopts an amendment reducing or suspending safe harbor contributions between March 13, 2020, and Aug. 31, 2020, the employer will not have to demonstrate that it was operating at an economic loss or that it reserved the right to reduce contributions in the safe harbor notice that it issued at the beginning of the plan year. This window is available to both matching contribution and nonelective contribution plans.

Safe-harbor nonelective contribution plans: Plans that use the 3% safe harbor nonelective contribution method must issue a supplemental notice to employees. However, the normal 30-day advance notice requirement does not apply if the employer gives the notice to employees no later than Aug. 31, 2020, and the employer adopts the required plan amendment that reduces or suspends safe harbor nonelective contributions no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

• For example, the employer could adopt an amendment eliminating the safe harbor contribution method effective as of July 16, 2020, as long as it issued the employees a supplemental notice by Aug. 31, 2020.

2. Safe harbor matching contribution plans: The Notice did not provide relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions because matching contribution levels communicated to employees directly affect employee decisions regarding an employee elective deferral (and, if applicable, employee after-tax contributions). Thus, employers who wish to reduce or suspend a safe harbor matching contribution must still provide 30 days advance notice to employees.

Other plans

The relief in the notice applies to the ACP test provisions of safe harbor 403(b) plans (the ADP test does not apply to such plans). However, the Notice did not reference SIMPLE 401(k) Plans, SIMPLE-IRA Plans or Salary Reduction Simplified IRA Plans (a SARSEP). 


The notice requirement for safe harbor nonelective plans seems somewhat inconsistent with the change made by section 103 of the SECURE Act in which Congress eliminated the notice requirements for plans that used the 3% nonelective contribution safe harbor, effective for plan years beginning after Dec. 31, 2019. Many plans are currently in a year that started Jan. 1, 2020 and did not have a notice requirement this year.

Testing required

If an employer permissibly suspends or reduces its safe harbor 401(k) plan contributions, such a plan will be subject to the ADP and ACP (if applicable) tests for the plan year.

Employer actions

Employers that have already reduced or suspended safe harbor contributions should review the Notice to determine whether they have done so in a permissible manner; and, if not, whether they can correct any failures to comply with the Notice. Employers that have not taken such steps yet have an expanded opportunity to suspend or reduce contributions to their plan for a limited time.

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