On June 29, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-52 that generally permits employers who sponsor safe harbor 401(k) plans to temporarily reduce or suspend certain contributions made during the COVID-19 crisis. As a bonus, the Notice also addresses reductions of certain midyear contributions that affect only “highly compensated employees” (“HCEs”), regardless of whether or not the reductions are made during the pandemic.
Background. Qualified retirement plans, including 401(k) plans, are required to adhere to certain nondiscrimination requirements, including annual tests, to ensure that such plans do not favor higher paid employees. One method of avoiding some of the tests is to adopt a “safe harbor plan,” in which the plan sponsor agrees to make a specified level of immediately vested employer matching or nonelective contributions to all participating non-highly compensated employees. In certain cases, an annual notice describing the employer contributions is also required. (See our article entitled “401(k) Safe Harbor Plan Overview” for details.)
With certain exceptions, such as during a year in which a sponsoring employer is operating at an economic loss, 401(k) plans may not be amended mid-year to reduce or suspend employer contributions used to satisfy the safe harbor plan provisions. 401(k) plans that are amended to reduce or suspend safe harbor contributions must meet special requirements, including the obligation to provide all eligible employees with a supplemental notice explaining the consequences and details of the amendment.
IRS Responds to COVID-19. In response to the global COVID-19 pandemic, the IRS has extended certain deadlines and granted plan sponsors other relief. (See, for example, our previous blogs entitled “IRS Extends Various 401(k) Deadlines in Response to COVID-19 Crisis” and “IRS Issues Rollover Relief for RMDs Waived Under CARES Act.”) Notice 2020-52 represents the latest attempt to assist employers who are facing hardships brought on by the virus, in recognition that, for example, the crisis may force employers to reduce or suspend contributions under their safe harbor plans in order to satisfy payroll and other operating costs.
NOTE: This article is not intended to detail all the rules relating to safe harbor plans or the special rules applicable to 401(k) plans due to COVID-19, but merely to highlight the new guidance contained in Notice 2020-52. For a more complete explanation of the topic, please refer to our earlier blogs referred to above.
Temporary Reductions or Suspensions of Safe Harbor Contributions Due to COVID-19. Recognizing the unprecedented nature of the COVID-19 crisis, Notice 2020-52 stipulates that an amendment to reduce or suspend either safe harbor matching contributions or safe harbor nonelective contributions will not violate the general rule limiting midyear amendments, provided the amendment is adopted between March 13, 2020, and August 31, 2020.
Further, the requirement to provide a supplemental notice is relaxed in many cases. So long as the amendment is not retroactive, plans relying on safe harbor non-elective contributions that are amended during this period need not provide the supplemental notice — which otherwise would be required to be provided at least 30 days in advance — until August 31, 2020.
Importantly, however, delayed notices are not permitted for plans reducing or suspending safe harbor matching contributions, because those contributions could affect employees’ contribution decisions. In other words, these plans must still provide supplemental notices at least 30 days before the reduction or suspension of safe harbor matching contributions is effective.
COMMENT: As long as the plan amendment is adopted within the appropriate time period, the employer is, in effect, presumed to be operating at an economic loss for the plan year, thus permitting the reduction or suspension during such plan year under existing regulations. There is no requirement to provide additional evidence or support of economic hardship.
Reduction of Contributions for HCEs Only. In addition to the temporary relief granted above, Notice 2020-52 permits 401(k) plan sponsors to reduce contributions made solely on behalf of HCEs midyear, regardless of whether the reduction is made during or after the March 13, 2020 to August 31, 2020 period. Notably, for safe harbor plans subject to the annual notice requirements (generally, plans relying on safe harbor matching contributions), an updated safe harbor notice and an election opportunity must be provided to HCEs to whom the mid-year change applies.
COMMENT: The Notice indicates that midyear reductions for HCEs are permissible because contributions made solely on behalf of HCEs are not technically considered “safe harbor contributions” subject to the regulations.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.