On June 29, 2020, the IRS issued Notice 2020-52 in response to the COVID-19 pandemic providing welcome relief to plan sponsors who are considering suspending safe harbor contributions and also to those who may already have regardless of whether the employer is suffering an economic loss. The notice is significant in that it permits employers who sponsor 401(k) plans to reduce or suspend their safe harbor contributions and redirect those funds to other, more urgent needs. However, plan sponsors must act quickly to take advantage of the relief by adopting the appropriate amendments and issuing participant notices by August 31, 2020.
As a general rule, regulations require a plan’s safe harbor provisions to remain in effect for an entire 12-month plan year and prohibit mid-year plan amendments to those provisions that would reduce or suspend contributions. However, there are two exceptions:
- If the employer is operating at an economic loss, or
- If the plan’s safe harbor notice (due 30 days prior to the beginning of the plan year) includes a statement that the plan may be amended during the plan year to suspend or reduce safe harbor contributions (sometimes referred to as a “safe harbor maybe” notice).
In either event, a supplemental notice must be provided to all participants at least 30 days in advance of the effective date of the reduction/suspension. The plan then becomes subject to the normal non-discrimination testing for the year.
Notice 2020-52 provides guidance in three main areas.
• First, it provides relief related to COVID-19, allowing plan sponsors to adopt mid-year amendments between March 13, 2020 and August 31, 2020 to eliminate safe harbor matching contributions or mid-year nonelective contributions for the remainder of the year and be deemed to have satisfied the threshold for “operating at an economic loss” or providing the “safe harbor maybe” notice. The amendment must be adopted no later than the date that the reduction/suspension occurred. It is important to note that this special relief regarding the suspension of safe harbor contributions does not eliminate the requirement that the plan will become subject to non-discrimination testing for the entire plan year.
• Secondly, it provides helpful clarification that sponsors can eliminate safe harbor 401(k) contributions for highly compensated employees (HCEs) only and retain the plan’s safe harbor status provided that the safe harbor 401(k) contributions continue to be made for non-highly compensated employees (NHCEs). A revised safe harbor notice should be delivered to the affected HCEs.
• Finally, the Notice provides temporary relief to the 30-day advance notice requirement for suspensions or reductions to safe harbor nonelective contributions as long as the updated safe harbor notice is provided no later than August 31, 2020 and the plan amendment is adopted prior to the effective date of the suspension. Plan sponsors should keep in mind that the IRS continues to require at least 30 days advance notice for mid-year suspensions or reductions to safe harbor matching contributions; whether or not these contributions are provided can influence the employee’s decision to make elective deferrals. ■
“A 2018 study concluded that 93% of households owning defined contribution accounts had access to, and used, the internet in 2016.” — Peter Swire and DeBrae Kennedy-May, “Delivering ERISA Disclosure for Defined Contribution Plans: Why the Time has Come to Prefer Electronic Delivery – 2018 Update,” (April 2018)