ANDREW S. WILLIAMS

Partner

KATHERINE M. OSWALD

Associate


Act NOW To Reduce 401(k) & 403(b) Safe Harbor Contributions

COVID-19 relief provisions that allow 401(k) and 403(b) plan sponsors to reduce or suspend safe harbor contributions expire soon. Plans must be amended by August 31, 2020 in accordance with the relief guidelines provided by IRS Notice 2020-52.

WHAT ARE SAFE HARBOR CONTRIBUTIONS?

Safe harbor contributions are additional employer contributions that allow plans to avoid annual numeric testing to assure that elective participant contributions are not skewed in favor of highly compensated employees (HCEs). Sponsors of many 401(k) plans have chosen to provide safe harbor contributions in order to allow their HCEs to always make the maximum permitted elective contribution.

Safe harbor contributions can be (1) "matching contributions" determined as a percentage of plan contributions elected by each participant, or (2) fixed "nonelective" contributions made to each eligible employee regardless of the employee's own plan contributions.

WHAT HAS CHANGED UNDER IRS NOTICE 2020-52?

Under prior law, safe harbor contributions could be suspended or reduced only if the employer is operating at an "economic loss" or if the employer advises participants that it has reserved the right to suspend safe harbor contributions upon a supplemental participant notice of any such suspension.

Under IRS Notice 2020-52, employers may amend their plans to reduce safe harbor contributions without regard to these requirements of prior law if they do so by August 31, 2020. Notice to participants and an opportunity to change their contribution elections must be given 30 days in advance with respect to the reduction of safe harbor matching contributions while notice of a reduction in safe harbor nonelective contributions can be given by the August 31, 2020 deadline.

IRS Notice 2020-52 also provides that the reduction or suspension of safe harbor contributions made to HCEs (and only HCEs) can be made at any time without impacting the plan's safe harbor status. A plan amendment, 30 days advance participant notice, and an opportunity to change their plan contribution elections would be required but the August 31, 2020 deadline would not apply.

Any employer that needs to reduce its financial obligation to make safe harbor 401(k) or 403(b) plan contributions in accordance with the COVID-19 relief provisions outlined above must take immediate action.

WE CAN HELP

GCT is available for any questions or concerns that you may have about changes you are considering, or have made, to your retirement plan. For additional information or to discuss your particular situation, please feel free to contact:

Andrew Williams
aswilliams@gct.law
(312.696.1373)

or

Katherine Oswald
kmoswald@gct.law
(312.696.1019)