On January 29, 2016, the Internal Revenue Service issued guidance on mid-year changes to safe harbor plans under Internal Revenue Code Sections 401(k), and 401(m). Notice 2016-16 significantly expands the permissible mid-year changes available to sponsors of safe harbor plans under prior guidance.
The Notice provides guidance on mid-year changes to a safe harbor plan or to a plan’s safe harbor notice content that do not violate the safe harbor rules on account of being mid-year changes. For purposes of this Notice, a mid-year change is one that is either effective on a day other than the first of the plan year or one that is effective on the first of the plan year but adopted after that date.
This expansion, of course, comes with a few requirements. Simply put, Notice 2016-16 requires that any changes must meet applicable notice and election opportunities and must not be on the list of prohibited mid-year changes.
Notice and Election Requirements
Not all mid-year changes require an employer to provide an updated safe harbor notice and election opportunity. Mid-year changes that do not alter required safe harbor notice content (even if the information is provided in a plan’s safe harbor notice) do not require any additional notice. Similarly, if the pre-plan year annual safe harbor notice included the required information about the mid-year change and its effective date, then no additional notice is required.
Any mid-year change that does alter a plan’s required safe harbor notice content requires both (1) an updated safe harbor notice that describes the change and its effective date and (2) a reasonable opportunity for the employees to change their cash or deferred and/or any after-tax employee contribution elections.
The updated notice must be provided within a reasonable period before the effective date, based on the facts and circumstances. Providing the notice between 30 and 90 days prior to the effective date is deemed reasonable. If notice prior to the effective date is impracticable, such as notice for retroactive changes, then providing notice as soon a practicable, and no later than 30 days after the change is adopted, is deemed reasonable.
A reasonable opportunity to change a cash or deferred election exists if an election period of 30 days is provided to employees. This election period must be provided prior to the effective date if practicable and, if not, as soon as practicable after the updated notice is provided (but not later than 30 days after the change is adopted).
Prohibited Mid-Year Changes
Notice 2016-16 explicitly prohibits three types of changes, and permits a fourth only if it meets additional requirements. These prohibited mid-year changes are:
- Increasing the number of years of service required to vest in safe harbor contributions under a qualified automatic contribution arrangement.
- Reducing or narrowing the group of employees eligible to receive safe harbor contributions. This prohibition does not limit an employer’s ability to make otherwise permissible changes under eligibility service crediting rules or entry data rules with respect to employees who are not eligible to receive safe harbor contributions as of the effective date or the date of adoption.
- Changing the type of safe harbor plan (for example, changing from a traditional 401(k) safe harbor plan to a qualified automatic contribution arrangement).
- Modifying or adding a formula used to determine matching contributions if the change increases the amount of such contributions or permitting 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 required updated notice and election opportunity (described above) are met and the change is made retroactively effective for the entire plan year.
Additional Changes that are Not Provided Relief Under Notice 2016-16
Despite only prohibiting four specific types of changes, the IRS makes it clear that not all other possible changes are permitted. Certain mid-year changes will violate the safe harbor plan rules unless applicable regulatory conditions are satisfied, including adopting a short plan year, changing a plan year, adopting safe harbor plan status, reducing or suspending safe harbor contributions and changing from a safe harbor plan to a non-safe harbor plan. In addition to those examples, the IRS cautions that other laws may affect the permissibility of mid-year changes including anti-cutback restrictions, nondiscrimination restrictions, and anti-abuse provisions.
It is likely that additional guidance on mid-year changes to safe harbor plans may be published later this year. The IRS has requested comments on whether additional guidance is needed, particularly for mid-year changes of plan sponsors involved in mergers and acquisitions.
This Notice is effective for mid-year changes made on and after January 29, 2016. The Notice also applies to 403(b) plans that apply the 401(m) safe harbor rules.
Well, we’ve toyed with your emotions enough on this subject…. the deadlines for ACA reporting have not changed. Truth be told, unless this law is repealed by a Republican President taking office next term, we’re likely stuck with the ACA reporting rules as they stand (as modified by further informal guidance). So, what if you encounter this situation under the current legal landscape? You’ve made it through information compilation and data entry processes, you’ve poured over the instructions on the Forms 1094 and 1095s (or better yet, hired a consultant to do that) and you’re now ready to submit your returns electronically to the IRS – maybe even “on time” under the initial deadlines before they were extended. Congratulations! But, what happens when you receive a dreaded “error” message in connection with that submission?
First and foremost, please stay calm!
We know you’re at your wits end with this whole endeavor, but that IRS is actually poised to help (we hope). Last week, the IRS held a webinar concerning how to deal with rejection. And while they cannot help you with rejection in the dating world (sorry us ERISA nerds are left to search the galaxy for someone who loves us for who we are and our “humor”), they may be able to assist with submission rejection errors. Slides from the presentation entitled “Things to Know, Overview of Rejection Triggers, Tax Year 2015 Lessons Learned, Form 1094/5-C Q&A” attempt to answer many questions on various types of errors filers may encounter (including differing types of errors at the Transmission level: (i.e., the entire Transmission is rejected) or Submission level (i.e., one or more but not all of the Submissions in a Transmission are rejected) and how to address these errors.
These slides also address a series of more general Q&As on how to complete the forms. For example, two Q&As state that Line 15 on Form 1095-C (which lists the employee share of lowest cost monthly premium for self-only MV coverage) should be completed if an offer of coverage (other than a qualifying offer for all 12 months of the calendar year) is reported on Line 14 whether or not the employee enrolled in the coverage offered. Stated simply, unless you’re entering Code 1A in the All 12 Months box in Line 14, then something should be listed on Line 15.
This latest publication is just one in a series of presentations hosted by IRS working groups and posted on IRS.gov. If you’re interested in reviewing prior releases, that information can be found here. Less technical and more legal ACA guidance issued by the IRS for applicable large employers is also all posted here.