The Internal Revenue Service (IRS) has issued temporary relief for sponsors of safe harbor retirement plans considering reduction or suspension of safe harbor contributions due to COVID 19. As explained below, Notice 2020-52 relieves certain burdens associated with amending safe harbor plans in the middle of the plan year. It both helps protect safe harbor plans that have already taken this step, and opens a window until August 31, 2020, to take action prospectively.
A safe harbor retirement plan requires the sponsoring employer to make minimum matching or non-elective employer contributions each year, referred to as "safe harbor" contributions. Ordinarily, an employer is permitted to amend a retirement plan to reduce or suspend safe harbor contributions midyear only if:
- (1) The annual safe harbor notice includes a statement that the employer may reduce or suspend the safe harbor contributions during the plan year (i.e., "reservation of rights" language); or
- (2) The employer is operating at an economic loss (as defined in IRS rules).
To amend the plan, the employer must also send a supplemental safe harbor notice to employees explaining the consequences of the plan amendment and how employees can change their deferral elections. In addition, the effective date of the plan amendment to reduce or suspend safe harbor contributions cannot be earlier than 30 days after employees are provided the supplemental notice.
Relief Provided by Notice 2020-52
Notice 2020-52 provides two types of temporary relief:
- (1) Plan sponsors who adopt plan amendments between March 13, 2020, and August 31, 2020, to reduce or suspend safe harbor matching or non-elective contributions mid-year will not be required to adhere to the requirement that either the safe harbor notice contain "reservation of rights" language, or that the employer be operating at an economic loss. This will help sponsors who took action earlier this year, who had to speculate that they would be operating at a loss for the year.
- (2) With respect to a plan amendment that reduces or suspends safe harbor non-elective contributions (not safe harbor matching contributions), Notice 2020-52 provides that a supplemental safe harbor notice need not be sent at least 30 days in advance of the effective date of the amendment as long as:
- a. The supplemental notice is sent no later than August 31, 2020; and
- b. The plan amendment reducing or suspending safe harbor non-elective contributions is adopted no later than the effective date of the amendment (i.e., the amendment cannot have retroactive effect).
This second type of relief is not extended to safe harbor matching contributions because matching contribution levels directly affect employee decisions regarding their deferrals, and therefore, advance notice regarding reduction of safe harbor matching contributions is vital, according to the IRS.
Reducing or suspending safe harbor contributions mid-year ordinarily results in the loss of safe harbor status, which will subject the plan to nondiscrimination testing for that plan year. If a plan fails nondiscrimination testing, a certain percentage of contributions made by or on behalf of highly-compensated employees (HCEs) may need to be distributed from the plan, among other potential corrective actions.
Although Notice 2020-52 provides plan sponsors some flexibility in adopting midyear amendments to reduce or eliminate safe harbor contributions, it does not insulate plans from the resulting loss of safe harbor status.
Clarification Regarding Amendments Affecting Only HCEs
Notice 2020-52 also clarifies that a mid-year plan amendment that only reduces safe harbor contributions made on behalf of HCEs is exempt altogether from the requirement that the safe harbor notice contain "reservation of rights" language, or that the employer be operating at an economic loss. Accordingly, plan sponsors may freely adopt midyear amendments that only reduce safe harbor contributions made on behalf of HCEs (irrespective of the COVID-19 window). However, under Notice 2016-16, such a plan amendment requires a supplemental safe harbor notice and an opportunity to change deferral elections be provided to affected employees at a reasonable time before the effective date of the change.
Plan sponsors of safe harbor retirement plans would ideally have wanted this relief to be issued earlier on during the COVID-19 pandemic. However, many employers will still welcome the flexibility it provides as they adjust to new economic realities.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.