You're Safe! IRS Provides Guidance on Mid-year Changes to Safe Harbor 401(k) Plans

By Jason Rothman, J.D.

While plan sponsors of safe harbor 401(k) plans have enjoyed the benefits of not having to worry about passing nondiscrimination and top-heavy testing, some have struggled with the limitations on making mid-year amendments to such plans. Amendments to safe harbor 401(k) plans are only permitted in limited situations as provided under IRS guidance. In Notice 2016-16, the IRS provides additional guidance allowing such mid-year amendments.


401(k) plans generally must pass nondiscrimination testing as it relates to benefits and contributions. These tests include the actual deferral percentage (ADP) test and actual contribution percentage (ACP) test. Under these tests, deferrals and contributions made on behalf of highly compensated employees ("HCEs") are compared to those made on behalf of non-HCEs to make sure that the deferrals and contributions do not impermissibly favor the HCEs.

As an alternative to having to pass the ADP and ACP tests, a plan may be designed as a "safe harbor" plan. Key compliance items to satisfy the safe harbor 401(k) plan requirements include: (1) the issuance of a notice (often referred to as a "safe harbor notice") prior to the beginning of the plan year advising eligible employees of their rights and obligations under the plan as well as the general features of the plan, and (2) the general requirement that the safe harbor plan provisions remain in effect for the entire 12-month plan year.

Notice 2016-16

The requirement that certain plan provisions remain in effect for the entire 12-month plan year has historically been something that frustrated plan sponsors who desired to make mid-year amendments to their plans. The IRS has previously issued guidance allowing mid-year amendments in very limited situations. Notice 2016-16 provides a welcomed framework allowing plan sponsors to make mid-year plan amendments without "blowing up" safe harbor status. Under the new guidance, a mid-year change to a safe harbor plan won't violate the safe harbor plan regulations provided that: (1) if it is a mid-year change to a plan's required safe harbor notice content, the notice and election opportunity rules described in the Notice (discussed below) are satisfied, and (2) the mid-year change is not described in the list of prohibited mid-year changes in the Notice (discussed below).

It is important to note that the following mid-year changes are not covered under the new guidance and remain subject to the applicable regulations:

1. Adoption of a short plan year or change in plan year;

2. Adoption of safe harbor status on or after the beginning of the plan year; and

3. Reduction or suspension of safe harbor contributions or changes from safe harbor status to non-safe harbor status.

In addition, the IRS specifically states that other applicable laws (such as the anti-cutback rules under Code Section 411(d), nondiscrimination rules under Code Section 401(a)(4) and anti-abuse provisions under Treasury Regulation 1.401(k)-1(b)(3)) may affect the permissibility of mid-year changes to safe harbor plans.

As noted above, there are specific notice and election opportunity conditions on a mid-year change to a safe harbor plan. First, an updated safe harbor notice that describes the mid-year change and its effective date must be provided within a reasonable period before the effective date of the change to each employee who otherwise would be entitled to a safe harbor notice. The timing requirement is a facts and circumstances test and will be deemed satisfied if provided within 30-90 days before the change. If it is not practicable to provide notice in advance of a change, it must be provided as soon as reasonably practicable, but no later than 30 days after the date the change is adopted. Second, each employee required to receive the notice must be given a reasonable opportunity to change his or her deferral election prior to the effective date of the change. For this purpose, a 30-day election period is deemed reasonable. If it is not practicable to provide the election opportunity in advance of a change, the opportunity must be provided as soon as reasonably practicable, but no later than 30 days after the date the change is adopted.

The Notice lists the following as prohibited mid-year changes:

1. A mid-year change to increase the number of completed years of service required for an employee to have a nonforfeitable right to the employee's account balance attributable to safe harbor contributions under a qualified automatic contribution arrangement (QACA);

2. A mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive a safe harbor contribution (noting that this does not apply to an otherwise permissible change under eligibility service crediting rules or entry date rules made with respect to employees who are not already eligible to receive safe harbor contributions, as of the date the change is made or adopted);

3. A mid-year change to the type of safe harbor plan (i.e., changing from a traditional safe harbor 401(k) plan to a QACA safe harbor 401(k) plan); and

4. A mid-year change to: (a) modify or add a formula used to determine matching contributions (or the definition of plan compensation for purposes of the match) if the change increases the amount of matching contributions, or (b) permit discretionary matching contributions. However, this prohibition does not apply if, at least three months prior to the end of the plan year, the change is adopted and the updated safe harbor notice and election opportunity are provided AND the change is made retroactively effective for the entire plan year.

Plan sponsors of 403(b) plans will appreciate that this guidance applies to 403(b) plans that apply the safe harbor rules under Code Section 401(m).


This Notice provides welcomed relief to plan sponsors who have struggled with the limitations on amending their plans mid-year. The examples in the Notice provide insight into what the IRS would accept (or reject) as permissible under the guidance. Notwithstanding this Notice, employers should not assume that they are free to make any particular amendment to their safe harbor plans mid-year and should discuss any mid-year change being considered with their trusted advisors.

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