IRS Issues Guidance Addressing Safe Harbor Retirement Plans:

On December 9, 2020, the IRS issued Notice 2020-86 (the “Notice”). This new guidance expands on sections 102 and 103 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), both of which apply to safe harbor plans. Those plans make legally-required employer contributions (in the form of matching contributions or nonelective contributions), and they satisfy other legal requirements, in order to pass automatically certain annual compliance tests. Some safe harbor plans include a qualified automatic contribution arrangement (“QACA”). Under a QACA, eligible employees automatically have a certain percentage of their pay withheld and remitted to the plan unless they opt out or elect a different contribution amount than the plan’s automatic amount. Those plans are subject to slightly less strict matching contribution and vesting requirements than safe harbor plans that do not include a QACA.  

Section 102 of the SECURE Act increased the 10 percent cap for QACA safe harbor plans. Thus, although the minimum QACA employee contribution still equals 3 percent of eligible compensation, the SECURE Act provided that the maximum QACA employee contribution cannot exceed 15 percent of a participant’s eligible compensation (or 10 percent during the initial period of QACA contributions). Under the Notice:

  • A QACA plan does not have to set the maximum participant contribution rate above 6 percent of eligible compensation.
  • Most QACA plans that increase the maximum participant contribution rate to a percentage greater than 10 percent but no greater than 15 percent during 2020, 2021, or 2022 have until the end of their 2022 plan year to adopt a plan amendment in this regard. QACA plans that adopt this provision after that date will have to adopt a plan amendment by the end of the plan year in which this provision becomes effective.

Section 103 of the Secure Act eliminated the safe harbor notice requirement for plans that provide safe harbor nonelective contributions and added new provisions for the retroactive adoption of safe harbor status for those plans. In this connection, here are some highlights of the Notice:

  • If a plan uses nonelective contributions to satisfy the safe harbor requirements, and the plan also provides certain non-safe harbor matching contributions, the plan does not have to provide a safe harbor notice to participants.
  • The SECURE Act did not change any other requirements that may apply to a plan that satisfies the safe harbor nonelective contribution requirements. For example, the Code section 414(w) notice requirements still apply when plans allow employees to elect to withdraw automatic elective contributions (and earnings) no later than 90 days after the date of the first elective contribution.
  • Some safe harbor plans that no longer must provide a safe harbor notice will likely choose to provide a notice that includes a statement that the plan may be amended mid-year to reduce or suspend safe harbor nonelective contributions. In this case, the plan will not fail to satisfy the Code section 401(k) or 401(m) regulations’ condition that such a statement must be included in a safe harbor notice.
  • If an employer amends a safe harbor plan to reduce or suspend the plan’s safe harbor nonelective contributions during a plan year, but later amends the plan to readopt such contributions for the entirety of the plan year, the plan will not be required to satisfy the ADP or ACP test (as applicable) for the plan year and will not be subject to the top-heavy rules under Code section 416 for the plan year.

The Notice also states that it “is not intended to provide comprehensive guidance as to §102 or 103 of the SECURE Act, but rather is intended to assist taxpayers by providing guidance on particular issues while the Treasury Department and the IRS develop regulations to fully implement these sections of the SECURE Act.”