June 25, 2020

IRS Grants Mid-Year Safe Harbor Relief

On June 29th, the IRS issued Notice 2020-52 to grant mid-year Safe Harbor (SH) relief for employers during the COVID-19 pandemic.  The Notice permits employers to suspend or reduce SH contributions in 401(k) and 403(b) plans after March 13, 2020 for the balance of the year, regardless of whether the employer is suffering an economic loss or gave a Safe Harbor Notice with “maybe not” language at the beginning of the year.  In addition, for non-Match SH plans, i.e. those providing a non-elective SH, advance 30-day notice is not required, as long as notice is provided by August 31, 2020 and plan amendments are adopted no later than the date of suspension.  SH Match plans still require 30-day advance notice for suspension.

The normal rules require that SH provisions must be in effect for the entire plan year, unless the Employer is operating at an economic loss, or the Safe Harbor notice distributed prior to the beginning of the year included a statement that the employer may suspend or reduce the SH contribution during the year upon providing employees 30-days advance notice.  Although mid-year SH suspension will provide financial relief to employers, it subjects the plan to nondiscrimination testing (ADP/ACP tests), which could result in contribution refunds to certain Highly-Compensated Employees (HCEs).  The Notice did clarify that if the suspension only applies to a plan’s HCEs, then the mid-year suspension will not affect the SH status of the plan for that year & therefore will not cause the plan to be subject to ADP/ACP testing.  This may be a viable option to help reduce employer costs, but keep the 401(k) contributions for its HCEs intact for the year without risk of refund.

It is still unclear whether it will be permissible to reinstate a non-elective safe harbor in the same year it was suspended.  We are sure there will be more to come.  Please contact us if you have specific questions about your own plan and we will be happy to provide guidance to help you with your options.