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PSCA Executive Reports

February 26, 2016

IRS Opens the Door for Certain Mid-Year Amendments To Safe Harbor Plans

The Internal Revenue Service (the “IRS”) recently issued guidance that permits plans to adopt certain mid-year amendments without jeopardizing safe harbor status.  Notice 2016-16, issued on January 29, 2016, resolves lingering concerns about mid-year plan changes and states that any such mid-year change either to a safe harbor plan or to such a plan's safe harbor notice would not violate the safe harbor rules merely because of the mid-year nature of that change so long as specified notice and participant election opportunity conditions are satisfied and any such mid-year change is not a prohibited mid-year change (under standards set forth in the notice).  For the purposes of the notice, a “mid-year change” is defined as either (a) a change first effective during a plan year but not as of the beginning of the plan year; or (b) a change effective as of the beginning of the plan year but adopted after the beginning of that plan year.  Notice 2016-16 is effective for mid-year changes made on and after January 29, 2016.

Certain mid-year changes generally are not subject to the provisions of the notice, including (a) the adoption of a short plan year or any change to the plan year; (b) the adoption of safe harbor plan status on or after the beginning of the plan year; and (c) the reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status.

As a condition for coverage under Notice 2016-16, an updated safe harbor notice that describes the mid-year change and its effective date must be provided to each employee otherwise required to be provided a safe harbor notice. That updated notice generally must be provided within a reasonable period before the effective date of the change.  In addition, each employee who must be given an updated notice also must be given a reasonable opportunity before the effective date of the mid-year change to change his or her cash or deferred election (and/or any after-tax employee contribution election).

Under Notice 2016-16, certain mid-year changes are prohibited, including (a) a mid-year change to increase the number of completed years of service required for an employee to have a nonforfeitable right to his or her account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement; (b) a mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions; (c) a mid-year change to the plan’s type of safe harbor status; and (d) a mid-year change to either modify (or add) a formula used to determine matching contributions if the change increases the amount of matching contributions or permit discretionary matching contributions.

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