3774 / What notice must be provided to participants in a 401(k) safe harbor plan?

Editor’s Note: Under the law prior to January 1, 2020, a safe harbor 401(k) plan was required to provide an annual participant notice prior to each plan year alerting participants to their plan rights and obligations. This notice was required whether the employer safe harbor contribution was provided by a nonelective (i.e., profit-sharing) or matching employer contribution. Under the SECURE Act for plan years beginning after December 31, 2019, the annual safe harbor notice has been eliminated for 401(k) plans that are based upon nonelective employer contributions. See Q 3776.

The notice requirement remains for plans based upon employer matching contributions. In addition, under the SECURE Act, a nonelective contribution 401(k) plan can be adopted on any date prior to 30 days before the end of the plan year still using the 3 percent of compensation nonelective contribution. However, if the noncontribution plan is adopted within the last 30 days of a plan year, the required nonelective contribution rises to 4 percent of compensation. Regardless, the ability to adopt a nonelective plan midyear is not available if the plan was a matching contribution safe harbor 401(k) plan at any time during a year.¹

Every year, an employer must provide certain written notices to each employee eligible to participate in a plan. This notice must be provided prior to the start of the plan year. The written notice must include a statement as to which type of safe harbor contribution will be made to the plan (i.e., the safe harbor match or safe harbor nonelective contribution). The statement must explain:

(1)  how the contribution is calculated and whether any conditions exist to be eligible to use it, including a description of the levels of safe harbor matching contributions;

(2)  whether any other contributions may be made under the plan or to another plan on account of elective contributions or after-tax employee contributions made to the plan;

(3)  the plan to which safe harbor contributions will be made if it is different from the plan containing the cash or deferred arrangement;

(4)  the type and amount of compensation that may be deferred under the plan;

(5)  how to make cash or deferred elections, including any administrative requirements that apply to such elections;

(6)  the periods available under the plan for making cash or deferred elections;

(7)  withdrawal and vesting provisions applicable to contributions under the plan; and

(8)  information that makes it easy to obtain additional information about the plan, including an additional copy of the summary plan description and telephone numbers, addresses, and, if applicable, electronic addresses, of individuals or offices from whom employees can obtain such plan information.²

A plan that fails to meet any of these requirements will fail to be a safe harbor plan and will require the ADP and/or ACP testing of the plan year.

The timing requirement for the notice requirement is satisfied if the notice is provided within a reasonable period before the beginning of the plan year. This requirement is deemed met if the notice is provided to each eligible employee at least 30 days, and not more than 90 days, prior to the end of the plan year (i.e., by December 1 for a calendar year).³ Further, under the SECURE Act, the notice requirements for safe harbor nonelective contributions of at least 3 percent of employer compensation has been eliminated (notice requirements for plans that provide only for an employer match remain in place).

Plan sponsors are permitted to amend their 401(k) plan documents to provide for safe harbor nonelective contributions (1) no later than 30 days prior to the end of the plan year or (2) if the employer contribution is at least 4 percent of employee compensation, after 30 days prior to the end of the plan year and before the last day for distributing excess contributions to the plan (usually, by the end of the next plan year).⁴

Notice 2020-86 provides information on how safe harbor retirement plans should implement the new SECURE Act rules. The SECURE Act increased the 10 percent cap for automatic enrollment safe harbor plans to 15 percent. The law also eliminated certain safe harbor notice requirements if the plan provides for safe harbor nonelective contributions. Under the guidance, plans are not required to increase the maximum qualified percentage of compensation, as long as the percentage is applied uniformly and does not exceed 15 percent (or 10 percent initially). Plans that incorporate the 15 percent limit by reference, yet continue to apply the 10 percent maximum, will fail to operate in accordance with their terms unless the plan is amended.

Further, the guidance confirms that the notice rules are only eliminated for certain plans. For example, if the plan is a traditional safe harbor 401(k) that satisfies the safe harbor nonelective contribution requirements, but also provides non-safe harbor matching contributions and is not required to satisfy the ACP test, the notice requirements continue in place.

Contingent Notice

There is one type of 401(k) safe harbor plan that requires a contingent notice. This plan design allows the employer to wait until 30 days before the close of the plan year to decide if the plan will be a safe harbor plan by making the fully-vested 3 percent of compensation, nonelective safe harbor. This type of plan must provide a contingent notice before the start of the plan year and a second notice when the employer decides to make the safe harbor contribution. The contingent notice must set forth the same information as above, and also state that the plan may be amended during the plan year to include the 3 percent safe harbor contribution. If the employer elects to make the contribution, the plan must be amended to reflect the contribution. Both the amendment and the follow-up notice are required to be provided to each eligible employee at least 30 days prior to the end of the plan year (i.e., by December 1 for a calendar year plan).⁵

Much of the information in the summary plan description can be cross referenced rather than set forth again in the notice.⁶ In either case, the notice must be sufficiently accurate and comprehensive to inform the employee of his or her rights and obligations and must be written in a manner calculated to be understood by the average employee eligible to participate.⁷