IRS Notice 2020-52: CARES Act Update

Background and Overview

On Thursday, June 29, 2020, the IRS released Notice 2020-52. The notice provides relief to Safe Harbor plans that, between March 31, 2020 and August 31, 2020, adopt an amendment to reduce or suspend Safe Harbor Match or Non-Elective contributions for the 2020 plan year.

Notice 2020-52 clarifies the mid-year amendment rules for Safe Harbor 401(k) and 401(m) plans. In response to the COVID-19 pandemic, Notice 2020-52 provides temporary relief from certain requirements that would otherwise apply to these plans.

HCE Contribution Reduction

The IRS Notice clarifies that the Safe Harbor requirements only require a contribution for NHCEs (Non-Highly Compensated Employees). Safe Harbor plans which provide a Safe Harbor contribution to both HCEs (Highly Compensated Employees) and NHCEs could be amended during a plan year to eliminate or reduce the contribution for the HCEs.

The amendment is subject to the mid-year amendment rules outlined in IRS Notice 2016-16. The rules require that an upfront notice be given to plan participants within a reasonable period of time before the amendment is effective. "Reasonable" in this instance is no less than 30 days. The notice must also provide the HCEs with an opportunity to change their employee contributions.

No Anti-Cutback Relief

While plan sponsors may amend their Safe Harbor plans mid-year to reduce or eliminate contributions to HCEs, there is no relief to the anti-cutback rules outlined in IRC §411(d)(6). Therefore, any amendment to reduce or eliminate contributions applies prospectively. The plan must still provide for Safe Harbor contributions that have accrued up to the effective date of the plan amendment that eliminates or reduces the contributions.

Notices And The SECURE Act

The SECURE Act's elimination of Safe Harbor notices for certain plans using Safe Harbor Non-Elective contribution. A conservative approach would be to provide Notice of any modifications even if your plan is a Safe Harbor Non-Elective plan that is now not subject to the annual Safe Harbor Notice requirements due to the SEUCRE Act. Especially if you amend to reduce or eliminate the Safe Harbor contributions to HCEs.

Temporary Relief

Normal Procedure - Mid-Year Amendments to Safe Harbor and Required Notices

• Temporary relief related to ability to reduce or suspend Safe Harbor contributions via mid-year amendment.
  • In general, an employer can only amend a Safe Harbor plan mid-year to reduce a Safe Harbor contribution if either:
    • (1) the employer is operating at an economic loss (as described in IRC §412(c)(2)(A)) for the plan year, or
    • (2) the plan’s Safe Harbor notice includes a statement that
      • (a) the plan may be amended during the plan year to reduce or suspend the Safe Harbor contributions and
      • (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.

Notice 2020-52 eliminates both of these requirements if the mid-year amendment to reduce or suspend the Safe Harbor contributions is adopted between March 13, 2020, and August 31, 2020.

NOTE: Most employers might not need this relief. In practice, most Safe Harbor notices (and most prepared by Uniglobal) are drafted to include language that references the employer's ability to suspend or reduce Safe Harbor contributions. 

Special Notice Relief For Safe Harbor Non-Elective Plans - 30-day Advance Notice Does Not Apply (conditionally)

• Temporary relief for the supplemental notice requirement for mid-year suspension or reduction of Safe Harbor Non-Elective contributions
  • A plan amendment that reduces or suspends Safe Harbor Non-Elective contributions during a plan year will not be treated as failing to satisfy the 30-day advance supplemental notice requirement of the Treasury Regulations if certain conditions are met.
  • The conditions are that:
    • The amendment is adopted between March 13, 2020, and August 31, 2020,
    • The supplemental notice is provided to eligible employees no later than August 31, 2020, and
    • The plan amendment is adopted and executed no later than the effective date of such reduction or suspension of the Safe Harbor Non-Elective contributions.

NOTE: This relief does not apply to a mid-year reduction of Safe Harbor Match contributions.

No Special Notice Relief For Safe Harbor Match Plans - 30-day Advance Notice Does Apply

The Safe Harbor Match contribution formula (i.e. the amount of the Match provided to eligible participants who elect to defer into the plan) that is communicated to employees directly impacts employee decisions regarding their elective contributions.

Therefore, the notice requirement is not relieved - sponsors must provide advanced notice (at least 30 days before) to participants should the plan amend to reduce or suspend the Safe Harbor Match.

NOTE: The temporary relief does not apply to other mid-year amendments. And as such, there is no relief from the advance notice requirements for other mid-year amendments.

The CARES Act, passed March 27, 2020, allows certain qualified retirement plans to adopt special, temporary, coronavirus-related distribution and loan provisions. Learn more from Uniglobal on this Act.