The IRS has issued Notice 2020-52, guidance that provides sponsors of 401(k) and 403(b) safe harbor plans limited relief from certain otherwise-applicable requirements for mid-year suspension or reduction of safe harbor matching or nonelective contributions.
Notice 2020-52’s temporary relief is being granted as a consequence of the widespread economic challenges facing employers as a result of the coronavirus (COVID-19) pandemic.
Requirement for Mid-Year Suspension of Safe Harbor Contributions
In order to suspend safe harbor matching or nonelective contributions mid-year, a sponsoring employer generally must meet one of the following requirements.
- The employer must be operating at an economic loss.
- The employer must have given employees timely notice prior to the start of the plan year that the plan might be amended to suspend safe harbor contributions during the coming plan year, and that such suspension would not apply until 30 days after a mid-year supplemental notice is given.
Temporary Relief for Mid-Year Reduction or Suspension of Safe Harbor Contributions
Employers that adopt or have adopted between March 13, 2020, and August 31, 2020, an amendment to suspend or reduce 401(k) or 403(b) safe harbor matching or nonelective contributions, will not be considered to have violated the economic loss or pre-plan year notice requirements described above.
Temporary Relief for Nonelective Contribution Supplemental Notice
Notice 2020-52 also provides temporary relief for employers that amended or amend their plans for a mid-year reduction or suspension of nonelective contributions, without providing a supplemental notice to employees at least 30 days before the reduction or suspension. This notice requirement will be treated as having been met if the notice is provided to employees by August 31, 2020. This relief is not being extended for a reduction or suspension of safe harbor matching contributions.
Clarification on Reduction or Suspension of Contributions for HCEs
Notice 2020-52 also provides further clarity on mid-year amendments to reduce certain contributions to highly compensated employees (HCEs).
In general, a reduction or suspension of safe harbor contributions only for HCEs is not treated as an impermissible reduction, since contributions on behalf of HCEs are not included in the definition of safe harbor contributions. However, Notice 2020-52 clarifies that a notice to HCEs of the reduction or suspension is still required, and a new deferral election opportunity must be given.
Notice 2020-52’s relief provides a degree of assurance that employers will not be violating safe harbor plan rules that pertain to reductions, suspensions, and notices, if they satisfy its conditions. But the guidance does not provide relief from ADP/ACP nondiscrimination testing for the plan year in which such reductions or suspensions have taken place.