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This post was researched and written by 2020 Summer Associate Kelsy Shay. Jana Weiler and Courtney Strutt Todd reviewed the post. 

As employers consider the financial impact of COVID-19, some are considering eliminating employer contributions to 401(k) and 403(b) plans. Notice 2020-52 addresses many employer concerns regarding mid-year amendments to safe harbor contributions to those plans, discussed in an earlier blog post. The notice clarifies the requirements and provides temporary relief for employers wanting to make plan amendments due to COVID-19.

Safe Harbor Plan Rules

The general rule is 401(k) and 403(b) retirement plans are subject to nondiscrimination testing to ensure both highly compensated and non-highly compensated employees are benefiting from the plan.  If the plan meets certain requirements, including minimum contributions by the employer, it will be considered a safe harbor plan that is exempt from the nondiscrimination testing. Many employers adopt the safe harbor plans to avoid the expense of performing the nondiscrimination testing, and the potential corrections necessary if the plan fails the testing. However, safe harbor plans cannot reduce or eliminate the safe harbor contributions once the plan has started, unless certain limited exceptions are met.

Temporary Relief for Mid-Year Plan Amendments

Normally, in order to make a mid-year plan amendment, employers must either be operating at an economic loss or have stated in the plan’s safe harbor notice that safe harbor contributions may be reduced or eliminated during the plan year with 30 days notice. Notice 2020-52 provides a safe harbor to that requirement, allowing plan amendments that reduce or suspend safe harbor matching contributions or nonelective contributions if the amendment is adopted between March 13, 2020, and August 31, 2020. In other words, you do not have to prove eligibility to make the amendment if the amendment was made during that time. But eliminating the matching contribution still requires giving notice to employees and allowing them time to change their elective contributions.

Typically, plan amendments that reduce or suspend safe harbor nonelective contributions require 30 days prior notice to employees.  Notice 2020-52 provides another safe harbor, determining the notice requirement is met for nonelective contributions so long as notice is provided no later than August 31, 2020, and the plan amendment is adopted no later than the effective date of the amendment. This change in notice requirements applies only for nonelective contributions, not for matching contributions.

Safe Harbor Status

As a reminder, if a plan changes the safe harbor matching contributions at any point during the plan year, the plan loses its safe harbor status for the entire year and will need to complete and pass discrimination testing. Employers should weigh the potential cost of performing the discrimination testing with the potential benefit of eliminating the matching or nonelective contributions.

Clarification Regarding Highly Compensated Employees

A mid-year plan amendment that reduces contributions made on behalf of highly compensated employees (HCEs) does not affect safe harbor contributions. However, this change does impact a plan’s safe harbor notice content, so an updated safe harbor notice must be provided to affected HCEs, along with an opportunity to change their election.

The Big Picture

Employers facing economic hardship and evaluating their options to reduce costs may consider reducing or eliminating their contributions to retirement plans. Regulatory changes allow employers to do so under certain circumstances, but at some cost. Employers should review their options with their benefits consultants and ERISA and tax attorneys.