IRS Guidance on SECURE Act Provisions that Affect Certain Safe Harbor Retirement Plans

IRS Notice 2020-86 addresses in the form of questions and answers certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) affecting safe harbor retirement plans for plan years beginning after December 31, 2019.

The SECURE Act generally increases from 10% to 15% the maximum automatic deferral under a qualified automatic enrollment safe harbor plan (“QACA”). It also eliminates certain safe harbor notice requirements for traditional safe harbor plans that provide safe harbor nonelective contributions and adds new provisions for the retroactive adoption of safe harbor status for those plans.

Automatic Enrollment Cap Percentage Increase

The SECURE Act provides a plan sponsor with the option to increase from 10% to 15% of eligible compensation as the maximum deferral contribution for a QACA safe harbor plan.

Notice 2020-86 provides that a plan that incorporates the maximum permissible percentage by reference must be amended by the end of the 2022 plan year if the plan sponsor intends for 10% to continue as the maximum permissible percentage. If that plan provision is not timely amended, then the plan will be treated as incorporating the 15% maximum retroactive to the first day of the plan year beginning after December 31, 2019. Thus, plan documents should be reviewed to ensure consistency with the plan sponsor’s intent to avoid an operational error.

Safe Harbor Notice

The SECURE Act eliminated the requirement that an advance notice of traditional safe harbor status be provided to plan participants by traditional safe harbor plans that are safe harbor plans because the employer makes a safe harbor nonelective employer contribution of at least 3% of participant compensation.

The SECURE Act did not change the requirement for the plan sponsor to provide advance notice at least 30 days before the beginning of the plan year for traditional safe harbor plans that are safe harbor plans because the employer makes safe harbor matching contributions.

Notice 2020-86 clarifies that the advance notice continues to be required for traditional safe harbor plans that combine the safe harbor nonelective employer contribution with non-safe harbor matching contributions and intend for the non-safe harbor matching contributions to be exempt from the average contribution percentage (“ACP”) test. A QACA safe harbor plan is not subject to this continued notice requirement.

Notice 2020-86 provides additional guidance for a plan sponsor who desires to convert its non-safe harbor plan to a safe harbor plan by amending the plan no later than 30 days prior to the end of the plan year to add a retroactive 3% nonelective employer contribution for the entire plan year.

Notice 2020-86 provides that for plan years after 2019, a plan sponsor who amends a traditional safe harbor plan after the beginning of a plan year to reduce or cease the safe harbor nonelective employer contribution may avoid average deferral percentage testing or ACP testing for that plan year by “re-adopting” a safe harbor plan for the entirety of the plan year. A retroactive amendment to the plan is required no later than 30 days prior to the end of the plan year to restore such contributions for the entire plan year.

2021 Plan Year

If an advance notice was required for the 2021 plan year, Notice 2020-86 provides that it may be provided as late as January 31, 2021 for a plan with a calendar year plan year.

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