New Guidance on SECURE Act Changes to Retirement Plans

The IRS issued guidance on changes to safe harbor plans made by the SECURE Act. Notice 2020-86 includes details on an increase from 10% to 15% of the maximum automatic elective deferral, and elimination of notice requirements for certain plans.

Guidance on Sec. 102 of the SECURE Act

IRS tax guidanceQ. In order to maintain its status as a QACA safe harbor Code Sec. 401(k) plan, is a QACA safe harbor Code Sec. 401(k) plan required, pursuant to Sec. 102(a) of the SECURE Act, to increase the maximum qualified percentage of compensation used to determine automatic elective contributions?

A. No. The qualified percentage under a QACA safe harbor Code Sec. 401(k) plan may be any percentage of compensation determined under the plan, as long as the percentage is applied uniformly, does not exceed the maximum percentage specified in Code Sec. 401(k)(13)(C)(iii) (15%, or 10% during the initial period of automatic elective contributions described in Code Sec. 401(k)(13)(C)(iii)(I)), and satisfies certain minimum percentage requirements specified in Code Sec. 401(k)(13)(C)(iii)(I) through Code Sec. 401(k)(13)(C)(iii)(IV).

Q. If a plan incorporates the maximum qualified percentage of Code Sec. 401(k)(13)(C)(iii) by reference, will the plan fail to operate in accordance with its terms merely because the plan continues to apply the maximum qualified percentage of 10% that applied under Code Sec. 401(k)(13)(C)(iii) before that section was amended by Sec. 102(a) of the SECURE Act?

A. No. However, the plan would need to be amended on or before the plan amendment deadline determined under Sec. 601(b) of the SECURE Act, as described in Notice 2020-68, 2020-38, to provide explicitly that the plan’s maximum qualified percentage is 10%, retroactive to the first day of the first plan year beginning after December 31, 2019. If a plan incorporates the maximum qualified percentage of Code Sec. 401(k)(13)(C)(iii) by reference and the plan is not amended on or before the plan amendment deadline determined under Sec. 601(b) of the SECURE Act to provide a specific maximum qualified percentage, then the plan will be treated as providing for the maximum qualified percentage specified in Code Sec. 401(k)(13)(C)(iii), as amended by Sec. 102(a) of the SECURE Act, effective as of the first day of the first plan year beginning after December 31, 2019. In this case, the plan will have failed to operate in accordance with its terms by applying the maximum qualified percentage of 10% that applied under Code Sec. 401(k)(13)(C)(iii) before that section was amended by Sec. 102(a) of the SECURE Act.

Q. What plan amendment timing rules apply to a plan amendment that increases the maximum qualified percentage of compensation used to determine automatic elective contributions to a percentage greater than 10% (but no greater than 15%) after the initial period of automatic elective contributions described in Code Sec. 401(k)(13)(C)(iii)(I)?

A. In general, the plan amendment timing provisions of Sec. 601 of the SECURE Act, as described in Notice 2020-68, apply to a plan amendment adopted under Sec. 102 of the SECURE Act. In addition, a plan may be amended to reflect Sec. 102 of the SECURE Act after the applicable plan amendment deadline under Sec. 601 of the SECURE Act, in accordance with the general discretionary amendment deadlines set forth in Rev Proc 2016-37, 2016-29 IRB 136, as most recently modified by Rev Proc 2020-40, 2020-38 IRB 575.

Guidance on Sec. 103 of the SECURE Act

Q. How does Sec. 103(a) of the SECURE Act affect the safe harbor notice requirements for a traditional safe harbor Code Sec. 401(k) plan or a traditional safe harbor Code Sec. 401(m) plan?

A. Section 103(a) of the SECURE Act amended the requirements for a traditional safe harbor Code Sec. 401(k) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C) by eliminating the safe harbor notice requirements of Code Sec. 401(k)(12)(D) (including the requirement under Reg § 1.401(k)-3(d)(3)(i) to provide a safe harbor notice within a reasonable period before an employee becomes eligible). However, Sec. 103(a) of the SECURE Act did not eliminate the safe harbor notice requirements of Code Sec. 401(m)(11)(A) for a traditional safe harbor Code Sec. 401(m) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C).

Thus, for example, if a traditional safe harbor Code Sec. 401(k) plan satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C), but also provides non safe harbor matching contributions that are structured to satisfy the requirements of Reg § 1.401(m)-3(d) (and, therefore, are not required to satisfy the ACP test), then the plan still must satisfy the safe harbor notice requirements of Code Sec. 401(m)(11)(A). On the other hand, if a traditional safe harbor Code Sec. 401(k) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C) also provides non safe harbor matching contributions that are not intended to satisfy the requirements of Reg § 1.401(m)-3(d) (and, therefore, are required to satisfy the ACP test), then the plan need not satisfy the safe harbor notice requirements of either Code Sec. 401(k)(12)(D) or Code Sec. 401(m)(11)(A).

Q. How does Sec. 103(a) of the SECURE Act affect the safe harbor notice requirements for a QACA safe harbor Code Sec. 401(k) plan or QACA safe harbor Code Sec. 401(m) plan?

A. Section 103(a) of the SECURE Act amended the requirements for a QACA safe harbor Code Sec. 401(k) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(13)(D)(i)(II) by eliminating the safe harbor notice requirements of Code Sec. 401(k)(13)(E) (including the requirement under Reg § 1.401(k)-3(d)(3)(i) to provide a notice within a reasonable period before an employee becomes eligible). The amendments made by Sec. 103(a) of the SECURE Act also result in the elimination of any safe harbor notice requirement under Code Sec. 401(m)(12) for a QACA safe harbor Code Sec. 401(m) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(13)(D)(i)(II). The result is different for a traditional safe harbor Code Sec. 401(m) plan, as described in Q&A-4 of this notice, than for a QACA safe harbor Code Sec. 401(m) plan because Code Sec. 401(m)(11) specifically requires a traditional safe harbor Code Sec. 401(m) plan to satisfy the safe harbor notice requirements of Code Sec. 401(k)(12)(D), but Code Sec. 401(m)(12)(A) merely requires a QACA safe harbor Code Sec. 401(m) plan to satisfy the requirements for a QACA safe harbor Code Sec. 401(k) plan.

Q. Does Sec. 103(a) of the SECURE Act change any other requirements?

A. No. Section 103(a) of the SECURE Act does not change any other requirements that may apply to a plan that satisfies the safe harbor nonelective contribution requirements applicable to a traditional or QACA safe harbor Code Sec. 401(k) plan under Code Sec. 401(k)(12)(C) or Code Sec. 401(k)(13)(D)(i)(II). For example, Sec. 103(a) of the SECURE Act did not change the notice requirements under Code Sec. 414(w)(4) for a plan that permits, pursuant to the eligible automatic contribution arrangement rules of Code Sec. 414(w), an employee to elect to withdraw automatic elective contributions (and earnings) no later than 90 days after the date of the first elective contribution with respect to the employee under the eligible automatic contribution arrangement. Accordingly, the Code Sec. 414(w)(4) notice requirements continue to apply even if the plan satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C) or Code Sec. 401(k)(13)(D)(i)(II).

As another example, Sec. 103(a) of the SECURE Act did not change the requirement under Reg § 1.401(k)-1(e)(2)(ii) that a cash or deferred arrangement (including an arrangement in a plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C) or Code Sec. 401(k)(13)(D)(i)(II)) provide an employee with an effective opportunity, determined based on all the relevant facts and circumstances, including the adequacy of notice of the availability of a cash or deferred election, to make (or change) a cash or deferred election at least once during each plan year.

Q. If a plan does not provide a safe harbor notice for a plan year beginning after December 31, 2019 (because, pursuant to Sec. 103(a) of the SECURE Act and Q&A 4 or Q&A-5 of this Notice, safe harbor notice requirements no longer apply to the plan), but the employer nevertheless provides a notice that includes a statement that the plan may be amended mid-year to reduce or suspend safe harbor nonelective contributions, as described in Reg § 1.401(k)-3(g)(1)(ii)(A)(2) and Reg § 1.401(m)-3(h)(1)(ii)(A)(2), and that otherwise satisfies the requirements for a safe harbor notice, will the plan fail to satisfy the condition in Reg § 1.401(k)-3(g)(1)(ii)(A)(2) or Reg § 1.401(m)-3(h)(1)(ii)(A)(2) that the statement regarding the possible mid-year reduction or suspension of safe harbor nonelective contributions be included in a safe harbor notice?

A. No. The plan will not fail to satisfy Reg § 1.401(k)-3(g)(1)(ii)(A)(2) or Reg § 1.401(m)-3(h)(1)(ii)(A)(2) merely because the employer included the statement described in Reg § 1.401(k)-3(g)(1)(ii)(A)(2) and Reg § 1.401(m)-3(h)(1)(ii)(A)(2) in a notice that otherwise satisfies the requirements for a safe harbor notice (rather than in an actual safe harbor notice). Further, solely with respect to the first plan year beginning after December 31, 2020, a notice will be treated as satisfying the requirement under Reg § 1.401(k)-3(d)(3) and Reg § 1.401(m)-3(e) that the notice be provided within a reasonable period before the beginning of the plan year if the notice is given to each eligible employee by the later of

  1. 30 days before the beginning of the plan year, or
  2. January 31, 2021.

However, except as provided in Q&A-8 of this Notice, the plan must satisfy all other requirements set forth in Reg § 1.401(k)-3(g)(1)(ii) or Reg § 1.401(m)-3(h)(1)(ii), as applicable, in order to reduce or suspend safe harbor nonelective contributions during the plan year.

Q. If an employer amends a traditional or QACA safe harbor Code Sec. 401(k) plan (or a traditional or QACA safe harbor Code Sec. 401(m) plan) to reduce or suspend the plan’s safe harbor nonelective contributions during a plan year, but later amends the plan to readopt the safe harbor nonelective contributions in accordance with Code Sec. 401(k)(12)(F) or Code Sec. 401(k)(13)(F) for the entirety of the plan year, will the plan be required to satisfy the ADP or ACP test (as applicable) for the plan year or be subject to the top heavy rules under Code Sec. 416 for the plan year?

A. No. The retroactive plan amendment provisions of Code Sec. 401(k)(12)(F) and Code Sec. 401(k)(13)(F), as amended by Sec. 103 of the SECURE Act, are not conditioned on whether a prior plan amendment reduced or suspended safe harbor nonelective contributions during the plan year. Accordingly, the plan will not be required to satisfy either Reg § 1.401(k)-3(g)(1)(ii)(E) (ADP testing) or Reg § 1.401(m)-3(h)(1)(ii)(E) (ACP testing) for the plan year and, pursuant to Code Sec. 416(g)(4)(H), the plan will not be subject to the top heavy rules under Code Sec. 416 for the plan year.

Q. If a plan is amended pursuant to Code Sec. 401(k)(12)(F)(i)(II) (traditional) or Code Sec. 401(k)(13)(F)(i)(II) (QACA) to adopt safe harbor nonelective contributions of at least 4% of compensation for a plan year, and the safe harbor nonelective contributions are contributed to the plan after the tax filing deadline for the prior taxable year (including extensions) but before the last day under Code Sec. 401(k)(8)(A) for distributing excess contributions for the plan year, are the safe harbor nonelective contributions deductible for the prior taxable year?

A. No. Code Sec. 404(a)(6) provides that a taxpayer will be deemed to have made a payment on the last day of the prior taxable year if the payment is on account of that taxable year and is made not later than the time prescribed by law for filing the return for that taxable year (including extensions). Therefore, the safe harbor nonelective contributions are not deductible for the prior taxable year because they are contributed to the plan after the latest date permitted under Code Sec. 404(a)(6) for a contribution to be deductible for the prior taxable year. However, the safe harbor nonelective contributions are deductible for the taxable year in which they are contributed to the plan, to the extent otherwise deductible under Code Sec. 404.

Q. For plan years beginning after December 31, 2019, do the retroactive plan amendment requirements of Code Sec. 401(k)(12)(F) or Code Sec. 401(k)(13)(F), as amended by Sec. 103 of the SECURE Act, apply to an amendment adopted during a plan year that adds the traditional or QACA safe harbor design set forth in Code Sec. 401(k)(12) or Code Sec. 401(k)(13) for the plan year using safe harbor nonelective contributions (rather than the retroactive plan amendment rules in Reg § 1.401(k)-3(f))?

A. Yes. Effective for plan years beginning after December 31, 2019, in order for a plan to be amended during a plan year to adopt the safe harbor design set forth in Code Sec. 401(k)(12) or Code Sec. 401(k)(13) for the plan year using safe harbor nonelective contributions, the plan must satisfy the retroactive plan amendment requirements of Code Sec. 401(k)(12)(F) or Code Sec. 401(k)(13)(F), as amended by Sec. 103 of the SECURE Act. Accordingly, the retroactive plan amendment rules of Reg § 1.401(k)-3(f) no longer apply for those plan years.

Q. For plan years beginning after December 31, 2019, do the retroactive plan amendment requirements of Code Sec. 401(k)(13)(F), as amended by Sec. 103 of the SECURE Act, apply to an amendment adopted during a plan year that adds the safe harbor design set forth in Code Sec. 401(m)(12) (QACA) for the plan year using safe harbor nonelective contributions (rather than the retroactive plan amendment rules in Reg § 1.401(m)-3(g))?

A. Yes. Effective for plan years beginning after December 31, 2019, in order for a plan to be amended during a plan year to adopt the safe harbor design set forth in Code Sec. 401(m)(12) for the plan year using safe harbor nonelective contributions, the plan must satisfy the retroactive plan amendment requirements of Code Sec. 401(k)(13)(F), as amended by Sec. 103 of the SECURE Act. Accordingly, the retroactive plan amendment rules of Reg § 1.401(m)-3(g) no longer apply for those plan years.

Q. For plan years beginning after December 31, 2019, do the retroactive plan amendment requirements of Code Sec. 401(k)(12)(F), as amended by Sec. 103 of the SECURE Act, apply to an amendment adopted during a plan year that adds the safe harbor design set forth in Code Sec. 401(m)(11) (traditional) for the plan year using safe harbor nonelective contributions (rather than the retroactive plan amendment rules in Reg § 1.401(m)-3(g))?

A. No. As described in Q&A-4 of this Notice, Sec. 103(a) of the SECURE Act did not eliminate the safe harbor notice requirements of Code Sec. 401(m)(11)(A) for a traditional safe harbor Code Sec. 401(m) plan that satisfies the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C). Accordingly, a plan sponsor must comply with the retroactive plan amendment rules of Reg § 1.401(m)-3(g) (including both the contingent and follow-up notice requirements under Reg § 1.401(k)-3(f)) in order for the plan to qualify as a safe harbor design set forth in Code Sec. 401(m)(11) after the beginning of the plan year using safe harbor nonelective contributions.

Q. What plan amendment timing rules apply to a plan amendment that is adopted after the beginning of a plan year to provide that the safe harbor nonelective contribution requirements of Code Sec. 401(k)(12)(C) (traditional) or Code Sec. 401(k)(13)(D)(i)(II) (QACA) will apply for the plan year, in accordance with Sec. 103(b) or Sec. 103(c) of the SECURE Act?

A. In general, the plan amendment timing provisions of Sec. 601 of the SECURE Act, as described in Notice 2020-68, apply to a plan amendment adopted under Sec. 103(b) or Sec. 103(c) of the SECURE Act (even if the applicable plan amendment deadline under Sec. 601 of the SECURE Act is later than the deadline under Sec. 103(b) or Sec. 103(c) of the SECURE Act). In addition, a plan may be amended after the applicable plan amendment deadline under Sec. 601 of the SECURE Act, in accordance with the plan amendment provisions of Sec. 103(b) or Sec. 103(c) of the SECURE Act (which provide an exception to the general discretionary amendment deadlines set forth in Rev Proc 2016-37, as most recently modified by Rev Proc 2020-40).

Join Our Newsletter

Sign up to receive exclusive newsletters with the latest information affecting you and your organization.

Posted in

SHARE THIS POST