Businesses make strategic changes throughout the year. These changes may involve ramping up or down employees, buying or merging with other businesses, or changing goals in such a way that HR needs to re-align benefits to reflect those goals.
Human resources departments, meanwhile, are working to follow either a calendar or fiscal year plan of important notices, paperwork, and changes for employees.
Is it possible, then, to make a change mid-year and implement a match safe-harbor 401k plan?
What is a match safe-harbor plan?
Employers can offer certain types of 401k plans to their employees that are “safe harbor” plans, essentially, plans that do not have to comply with the IRS’s various balancing tests.
A match plan is one where the employer matches the employee’s contribution to the 401k plan, up to a certain percentage.
There are several different ways to structure these plans, depending on business needs.
Can a business change or implement a safe harbor plan mid-year?
According to IRS Notice 2016-16, yes, a business can change or implement a safe harbor plan, so long as it is not a prohibited change. Changes to safe harbor plans, or to a plan’s safe harbor notice do not violate the rules so long as the plan complies with notice and election opportunity rules.
A safe harbor plan can, for example, change their default investment fund or alter the plan’s rules on how it handles disputes without causing problems. The safe harbor plan must simply comply with the notice requirements, making sure plan participants are aware of any changes.
When changing or offering a new plan, the employer must ensure that employees receive updated notices that clearly describe the changes.
These notices should occur a reasonable length of time before the effective date for implementing a change. Generally, 30-90 days is considered a reasonable amount of notice. This notice period gives employees enough time to make changes to their plan before the new rules go into effect.
Impermissible mid-year changes
However, you cannot make certain types of changes to safe harbor plans mid-year. For example, a business cannot change the number of years an employee must work before they have a nonforfeitable right to their account balance.
Further, businesses cannot change the type of safe harbor plan offered to employees (i.e., from a traditional 401k safe harbor plan to a QACA safe harbor plan).
Businesses, with some exceptions, cannot add or change the formula for matching contributions or change in a way that permits discretionary matching contributions.
Exceptions to this rule include changes made at least three months before the end of the plan year and the employer provides an update safe harbor notice and election notice at least three months prior to the end of the plan year and the changes are retroactive and apply to the entire plan year.
Anne Tyler Hall is the owner and principal attorney of Hall Benefits Law. HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
Managing Partner at HBL
