IRS issues Q&As on SECURE Act safe harbor 401(k) plan changes

IRS Notice 2020-86 clarifies the impact of two changes to safe harbor 401(k) plans made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act (Division O of Pub. L. No. 116-94). One set of Q&As covers the increased maximum deferral rate for qualified automatic contribution arrangements (QACAs). Other Q&As explain the relaxed notice and retroactive amendment rules for plans providing safe harbor nonelective contributions (NECs). Comments on the notice are due by Feb. 8, 2021. IRS continues to work on regulations that will address these changes more comprehensively.

QACA maximum default deferral rate

Prior to the SECURE Act, the maximum permissible automatic deferral rate under a QACA was 10%. The SECURE Act increased the maximum rate to 15% after the first full plan year following the date an employee is automatically enrolled (the 10% cap still applies until then). Notice 2020-86 provides the following guidance on the increased cap:

• Plans are not required to apply the 15% deferral rate. It’s a maximum, not a requirement.
• If a plan applies the maximum rate by incorporating the applicable Internal Revenue Code provisions by reference, the sponsor shouldn’t need to amend its plan to increase the maximum to 15% after the participant’s first plan year. But if the sponsor wants to keep the maximum at 10% for all plan years, the sponsor will need to amend the plan by the SECURE Act’s amendment deadline — the end of the first plan year starting in 2022 (2024 for governmental plans).
• The SECURE Act’s plan amendment deadline also applies if sponsors want to set the maximum rate between 10% and 15% after an automatically enrolled employee’s first full plan year. If a sponsor makes this change after the SECURE Act amendment deadline, the change will be subject to the usual discretionary amendment timing rules.

Relaxed rules for safe harbor NECs

The SECURE Act relaxed several rules relating to plans that provide safe harbor NECs. These changes apply to plan years starting after Dec. 31, 2019.

Elimination of safe harbor notice

The SECURE Act eliminated the required safe harbor notice for safe harbor NECs, but not for certain matching contributions. IRS clarifies how this change affects different safe harbor plans:

• Under a traditional safe harbor 401(k) plan, the safe harbor notice isn’t required for NECs made to satisfy the actual deferral percentage (ADP) safe harbor. But if the plan also provides for matching contributions designed to let the plan satisfy the actual contribution percentage (ACP) safe harbor, then the notice is still required.
• A QACA that provides for safe harbor NECs isn’t required to provide a safe harbor notice — either the annual notice or the notice before an employee becomes eligible for the plan. Even if the plan also offers a match designed to satisfy the ACP safe harbor, neither notice is required.
• If a plan has an eligible automatic contribution arrangement (EACA), the plan must provide employees with the EACA notice explaining their rights under the plan (e.g., opting out, selecting a deferral percentage other than the default, understanding the default investment arrangements, withdrawing auto-enrollment contributions, etc.). The plan must provide this notice even if the EACA is part of a QACA that provides for safe harbor NECs.
• The SECURE Act did not eliminate or change the requirement to provide a notice of employees’ opportunity to make or change a cash or deferred election at least once during each plan year.

Notice of suspension or reduction. The 401(k) regulations allow an employer to suspend or reduce safe harbor contributions if it is operating at an economic loss or included a statement in the safe harbor notice that the contributions could be suspended midyear. Although the SECURE Act eliminated the safe harbor notice for some plans, Notice 2020-86 clarifies that employers wanting to preserve the right to reduce contributions must still provide this advance warning to employees, though it needn’t be in an actual safe harbor notice. For the 2021 plan year, this notice will be considered timely if given by the later of (i) 30 days before the start of the plan year or (ii) Jan. 31, 2021.

Adding safe harbor NECs retroactively

The SECURE Act allows employers to add safe harbor NECs retroactively for a plan year if the amendment is adopted more than 30 days before the end of the plan year — or by the end of the following plan year if the amendment requires a NEC of at least 4%. The notice clarifies the following:

• The new retroactive amendment rules apply to plans for which the safe harbor notice is no longer required. Sponsors can use the rules to add a safe harbor NEC so (i) a traditional 401(k) plan can satisfy the ADP safe harbor, and (ii) an automatic-enrollment plan can satisfy the ADP and ACP safe harbors as a QACA.
• Sponsors that want to retroactively add a safe harbor NEC so their traditional 401(k) plans can satisfy the ACP safe harbor must follow the pre-SECURE Act rules in the 401(k) regulations. Before the start of the plan year, the sponsor must issue a “contingent safe harbor notice” stating that the plan might be amended to provide for safe harbor NECs. The sponsor must also adopt the amendment and give each eligible employee a follow-up notice at least 30 days before the end of the plan year. This option is available only if the plan uses the current-year ACP testing method.
• The new amendment rules apply to both the addition of a safe harbor NEC and the reinstatement of suspended or reduced contributions. If an employer suspends or reduces safe harbor NECs during the plan year, the employer may retroactively reinstate the contributions for the entirety of the plan year to avoid having to satisfy the ADP or ACP test or the top-heavy rules for that plan year.
• If an employer adopts the retroactive 4% (or greater) safe harbor NEC after its tax-filing deadline (including extensions) for the prior taxable year, then the contribution is deductible in the tax year in which the contribution is made, not the prior tax year.
• If an employer retroactively adds a safe harbor NEC to satisfy the ADP safe harbor in a traditional safe harbor plan or the ADP or ACP safe harbor in a QACA, the employer can adopt the amendment by the later of:

─ The new deadline for retroactive safe harbor NECs as described above

─ The generally applicable amendment deadline for all changes under the SECURE Act to adopt a conforming amendment — i.e., the end of the first plan year starting in 2022 (2024 for governmental plans)

Impact on 403(b) plans

The notice clarifies that the guidance applies on similar terms to 403(b) plans that make safe harbor NECs to satisfy the ACP safe harbor. (Section 403(b) plans are not subject to ADP testing.)