IRS Releases SECURE Act Guidance for Safe Harbor Plans

As background, qualified retirement plans are prohibited from providing contributions or benefits that discriminate in favor of highly compensated employees. Instead of satisfying the annual nondiscrimination tests with respect to elective deferrals and matching contributions, an employer can choose to make safe harbor non-elective and/or matching contributions. Additionally, as an alternative to a traditional safe harbor plan design, an employer can adopt a qualified automatic contribution arrangement (QACA), which combines safe harbor contributions with an automatic enrollment feature.

Section 102 of the SECURE Act increased the QACA elective deferral maximum percentage from 10% to 15%. The guidance explains that a QACA is not required to adopt this increase. Rather, the qualified percentage under a QACA safe harbor 401(k) plan may be any percentage of compensation specified under the plan, provided it is applied uniformly and does not exceed 10% during the initial period of participation and 15% thereafter.

However, the plan document may need to be amended if the language incorporates the 15% rate by reference (e.g., by referring to the maximum permitted rate under the Code) and the plan sponsor wishes to continue to apply the prior 10% maximum rate. In such case, the plan would need to be amended retroactive to the first day of the plan year beginning after December 31, 2019, in accordance with the timeframes referenced in IRS Notice 2020-68.

Section 103 of the SECURE Act removed the safe harbor notice requirements for traditional and QACA 401(k) plans that satisfy the automatic deferral percentage safe harbor through safe harbor non-elective contributions. The guidance confirms that safe harbor notices must still be provided for traditional safe harbor 401(m) plans in order for matching contributions not to be subject to automatic contribution percentage testing.

Additionally, plans wanting the ability to reduce or suspend safe harbor contributions mid-year and maintain safe harbor status must still provide notice before the beginning of the plan year. However, one-time relief is provided for plans that elected safe harbor status for 2021 without providing such advance notice (as allowed under Section 103). Specifically, these plans can issue a notice to eligible participants describing the potential mid-year reduction or suspension of safe harbor non-elective contributions by January 31, 2021.

The notice also addresses questions related to retroactive adoption of safe harbor status. The SECURE Act allows traditional and safe harbor 401(k) plans to attain safe harbor status by adoption of an amendment no later than 30 days before the plan year end (if providing 3% non-elective employer contributions) or by the end of the following plan year (if providing a 4% non-elective contribution). The notice explains that a 4% non-elective contribution would not be deductible for the prior year if contributed to the plan after the tax filing deadline for such year (including extensions). Additionally, guidance is provided with respect to the applicable amendment deadlines to adopt safe harbor status under the new SECURE Act provisions.

Employers who sponsor safe harbor 401(k) plans may find this guidance instructive.

IRS Notice 2020-86 »