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401(k)ology – Mid-Year Changes to Safe Harbor Plans

By Joni L. Jennings, CPC, CPFA®, NQPC™ | Published April 8, 2025

Most 401(k) plans run on a calendar year basis, so now that it is mid-year, some plan sponsors may want to make changes to the provisions in the company retirement plan. Safe harbor 401(k) plans have special rules that apply when amending the plan, and certain provisions cannot be modified in the middle of a plan year. If the plan is a safe harbor 401(k) plan, it is important to understand what changes can be made to the plan mid-year, including the timing and notice requirements.

Safe harbor 401(k) plans can be a great solution for employers that have difficulty passing the annual nondiscrimination testing and wish to avoid making refunds of deferrals and/or matching contributions to the Highly Compensated Employees (HCEs). In addition, safe harbor 401(k) plans have become attractive to employers of all sizes because they eliminate the testing deadline (2.5 months after the plan year end) imposed on plans subject to the Average Deferral Percentage (ADP) Test and Average Contribution Percentage (ACP) Test.

While there are many benefits to a safe harbor 401(k) plan design, there are certain restrictions that apply to discretionary plan amendments that plan sponsors should be aware of and are often overlooked when implementing this type of plan. Our prior post 401(k)ology – Safe Harbor 401(k) Plans focuses on the benefits and plan design options available to plan sponsors, so the focus of this post is the difference between permitted and prohibited mid-year changes to safe harbor 401(k) plans.

Discretionary Plan Amendments

A discretionary plan amendment is a voluntary change made by the plan sponsor to the 401(k) plan that is not required by law or regulation. Employers typically make discretionary amendments to 401(k) plans to reflect changes in company objectives, to improve employee benefits, and to align provisions with competitors in the marketplace. Some of the most common discretionary plan amendments to 401(k) plans include:

• Changes to the eligibility requirements and/or entry dates for plan participation
• Adding hardship distribution options or loan provisions
• Changes to the plan’s definition of eligible compensation
• Adding automatic enrollment and/or auto escalation features
• Adding after-tax voluntary contributions
• Changes to the discretionary match or profit-sharing contributions

Typically, retirement plans may be amended at the employer’s discretion to provide additional benefits or enhanced provisions as long as the amendment is timely adopted; and, if the plan is a safe harbor 401(k) plan, the change is not a prohibited mid-year amendment (details below).

Discretionary amendments cannot violate a limitation known as the anti-cutback rule, which states that a protected benefit that an employee has already earned the right to cannot be taken away. The anti-cutback rules of Internal Revenue Code Section 411(d)(6) include a list of benefits that cannot be eliminated as well as a list of provisions that are not protected. To illustrate, below are some common provisions that impact 401(k) plans and whether those provisions are protected or not:

Protected Benefits:

• Accrued vesting of employer contributions
• The plan’s normal retirement age
• Allocation conditions to share in an employer contribution (if any employee has earned the right to an allocation in the current plan year)
• Optional forms of distribution (e.g., lump sum, early distribution, in-service distribution)

Benefits that may be eliminated:

• Participant loan provisions
• Ability to make after-tax voluntary contributions
• Joint & survivor annuity options for non-pension type accounts (pension types include Money Purchase, Cash Balance or Defined Benefit Plans)
• Hardship distributions (or the requirements to obtain a hardship)

When requesting a discretionary plan amendment, the plan’s service providers will assist in determining if the requested plan change can be made and will help ensure that the change in provisions does not violate any of the IRC §411(d)(6) protected benefits. The service provider will indicate if specific timing rules apply (prospective change versus a change that may be retroactive) and the date by which the plan sponsor must execute the amendment.

These basic principles regarding discretionary plan amendments aid in understanding the rules specific to amendments to safe harbor 401(k) plans.

Safe Harbor Plan Basic Requirements

Safe harbor 401(k) plans must satisfy certain requirements to get the “free pass” on annual nondiscrimination testing. Required employer contributions to the Non-Highly Compensated Employees (NHCEs) and annual notices are commonly known, but there are other requirements that may not garner as much attention, including:

• 12 Month Plan Year Requirement: With few exceptions, safe harbor provisions must be adopted before the first day of a plan year and must remain in effect for the entire 12 months. A plan year may run on either a calendar year or fiscal year basis. Exceptions to the 12 month requirement:

  • Initial Plan Year– Plan year must be at least 3 months
  • Short Plan Year– An employer wishing to change plan years (i.e., from fiscal year to calendar year) may have a short plan year if the safe harbor requirements were satisfied for the 12 months before the short plan year and the 12 months following the short plan year.
  • Final Plan Year– Plan termination occurs mid-year. More details to follow specific to safe harbor plan terminations.

• Nondiscriminatory Compensation used for Employer Safe Harbor Contributions: The compensation used in calculating a NHCEs safe harbor contribution must be nondiscriminatory pursuant to IRC §414(s). Safe harbor plans are commonly designed to automatically satisfy the nondiscriminatory definition of plan compensation by using either Form W2 compensation or IRC §415 compensation. However, plans may exclude certain items from compensation as long those items are in the list of “excludable” items (e.g., fringe benefits, reimbursements, and the exercise of certain stock options) or as long as an annual test is performed to demonstrate that the definition is not discriminatory (i.e., when bonuses or other non-regular compensation is excluded). The latter defeats the purpose of avoiding complicated testing but may be used if it is reasonable and does not discriminate against NHCEs.

• No Allocation Conditions: Unlike 401(k) plans that include discretionary employer contributions which may impose a certain number of hours worked in a plan year or require employment on the last day of the plan year to share in the discretionary contribution, safe harbor 401(k) plans do not permit the employer to impose any allocation conditions for the NHCEs eligible to defer (remember that employer contributions to a safe harbor plan are required).

• Exclusion of HCEs from Safe Harbor Contributions: Safe harbor contributions are not required to be made for HCEs, and that applies to either the safe harbor non-elective contributions or the safe harbor matching contributions.

Late Adoption of Safe Harbor Non-Elective Contribution (SHNEC 3% or 4%)

Thanks to SECURE Act 1.0, special rules are now available for the late adoption of a safe harbor 401(k) plan. A 401(k) plan may be amended to add the 3% SHNEC formula as late as 30 days before the end of the current year (for a calendar year plan the deadline would be December 1st). The SHNEC is effective retroactively to the first day of the current year. If the employer misses that deadline, it may still amend the plan to add the SHNEC for the plan year any time after December 1st (for a calendar year plan) until the due date of the corporate tax returns for that plan year; however, the required contribution increases from 3% to 4%. For more information refer to our prior post 401(k)ology – Safe Harbor 401(k) Plans.

• Note: The late adoption rules do not apply to Safe Harbor 401(k) Plans that elect to use a Safe Harbor Match formula to satisfy the contribution requirement because the match is contingent on deferrals and the annual notice regarding the safe harbor matching contribution formula must be provided at least 30 days before the beginning of a plan year.

Changes Permitted Mid-Year to Safe Harbor 401(k) Plans

Before 2016, the IRS allowed very few changes to a safe harbor 401(k) plan after the plan year commenced. In January 2016, the IRS issued guidance in Notice 2016-16 that significantly expanded an employer’s ability to amend the plan during the plan year if certain requirements are met and a new safe harbor notice is provided at least 30 days prior to the effective date of the change (only required if the amendment impacts the information included in the original safe harbor notice for that plan year).

A safe harbor notice is required for any plan that utilizes a safe harbor match (basic or enhanced). The notice is not required for plans that use a safe harbor non-elective (SHNEC) formula (3% or more)—unless the plan includes additional matching contributions that will be tested under the ACP Test safe harbor rules—because a SHNEC is not contingent on an employee making deferrals to the plan (3% or more is provided to all employees eligible to make deferrals).

Assuming that a safe harbor notice is required for the plan, below are items that must be communicated to the eligible employees at least 30 days before the start of a plan year:

• The type of safe harbor contribution that will be made to the plan (safe harbor match or safe harbor non-elective)
• The formula used for the safe harbor match (basic or enhanced)
• If additional matching contributions are made to the plan, the type of additional matching contributions (discretionary or fixed) and any allocation conditions that must be completed to share in the additional match (allocation conditions not applicable to ACP Test safe harbor match)
• Compensation used for deferrals and the safe harbor contributions
• Deferral election procedures
• Distribution procedures, types available (i.e., in-service distributions or hardship withdrawals)
• Vesting schedules that apply to any employer-provided contributions

Generally speaking, a plan amendment that is more generous to all eligible employees is permitted to be made mid-year without affecting the safe harbor 401(k) status of the plan. Examples include:

• Adding Roth deferrals to a plan that previously did not permit Roth
• Adding distribution options to the plan (i.e., hardships and in-service at age 59.5)
• Adding participant loan provisions
• Prospectively amending the eligibility requirements for employees who have not yet become eligible to participate in the plan
• Changing plan entry dates
• Increasing the SHNEC from 3% to 4% for all eligible employees
• Adding automatic enrollment (other than an EACA or QACA)
• Mid-year amendments required by law

Now that there is a general understanding of what changes can be made, let’s discuss certain items that cannot be made to a safe harbor plan mid-year without losing the “free pass” on nondiscrimination testing.

Prohibited Mid-Year Changes to Safe Harbor 401(k) Plans

Certain plan changes cannot be made to a safe harbor 401(k) plan mid-year:

• A change to the plan’s vesting schedule attributable to safe harbor contributions under a QACA safe harbor plan (i.e., from 100% vested safe harbor contributions to 1 or 2 years to be 100% vested).
• An amendment that would reduce the number of employees eligible for the safe harbor contribution (i.e., making a division or employee classification ineligible mid-year).
• The type of safe harbor plan (i.e., from a traditional safe harbor plan to a QACA safe harbor plan, or from a plan that uses the SHNEC to a safe harbor match).
• Any change that modifies or adds a matching contribution formula that increases the amount of match or adds a discretionary matching contribution to the plan. Exceptions:
  • The change to the non-safe harbor match is adopted at least 3 months before the end of the plan year, and
  • The change is made retroactive for the entire plan year, and
  • A revised safe harbor notice is provided to the employees, and the employees are given an opportunity to change deferral elections at least 3 months before the end of the plan year.

Suspension of Safe Harbor Contributions

Safe Harbor plans cannot be amended mid-year to reduce the safe harbor contributions unless there is a significant change in business circumstances. In order to qualify, the business must either be operating at an economic loss or the safe harbor notice that was provided to all eligible employees included a statement that the employer may reduce or suspend the safe harbor contributions mid-year.

• Consequences of Mid-Year Suspension
  • Must notify employees at least 30 days prior to the effective date of the suspension
  • Must provide the employees a reasonable opportunity to change deferral elections
  • Must amend the plan to apply the current year testing method for ADP/ACP Testing for the entire year
  • Must make the safe harbor contributions on compensation and deferrals made through the effective date of the suspension
  • The plan loses the top-heavy exemption for the year of suspension

The majority of safe harbor notices include a statement that the employer may reduce or suspend the safe harbor contributions mid-year; therefore, even if the employer is not operating at an economic loss, the safe harbor contributions may be eliminated prospectively as long as the employer is willing to accept the above consequences of doing so.

• Practice note: Safe harbor notices are no longer required for certain plans that provide the 3% or 4% SHNEC (where there is no matching contribution under the ACP Test safe harbor); however, an employer may not suspend or reduce the SHNEC mid-year if a notice is not provided indicating that it may be reduced or suspended mid-year without an economic loss. Therefore, it is always recommended that the employer provide the safe harbor notice for plans electing the SHNEC, even if not required to do so.

Safe Harbor Plan Terminations

Safe harbor 401(k) plans may be terminated mid-year without some of the consequences outlined above if the cause is a substantial business hardship or a business transaction that impacts the employer (acquisitions, mergers, and sales or a change in business structure that causes an entity to either become an unrelated or related employer).

If the plan is terminated due to one of those reasons, the plan will not lose its safe harbor status for the year of plan termination. In that case, the following rules apply:

• A supplemental 30-day notice is not required prior to plan termination
• Plan remains exempt from ADP/ACP Testing for the year of plan termination
• Plan remains exempt from top-heavy requirements for the year of plan termination
• Safe harbor contributions must be made on compensation and deferrals from the first day of the plan year through the effective date of plan termination

Conclusion

Safe harbor 401(k) plans are designed to provide employers with certain benefits, predominantly as a solution to manage or reduce the need to refund contributions to highly compensated employees when nondiscrimination testing consistently fails. Other employers opt for a safe harbor plan design simply to remove the burden of compliance testing deadlines or top-heavy contribution requirements. Regardless of the reasons an employer elects safe harbor plan status, plan sponsors need to be aware of the mid-year amendment and other limitations imposed on safe harbor plans before choosing this type of retirement plan arrangement.

Newfront Retirement Services’ team of advisors and dedicated service team are always available to help plan sponsors determine if a safe harbor plan design can work for them, or to assist when unexpected business conditions occur. Feel free to contact me or just connect to keep up to date on all things ERISA 401(k): Joni_LI and 401(k)ology

Helpful Links:

• 401(k)ology – Safe Harbor 401(k) Plans
• IRC §414(s) Nondiscriminatory Compensation
• Mid-year changes to safe harbor 401(k) plans and notices
• IRS Notice 2016-16