MID-YEAR AMENDMENTS TO SAFE HARBOR 401(K) PLANS AFTER NOTICE

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1 MID-YEAR AMENDMENTS TO SAFE HARBOR 401(K) PLANS AFTER NOTICE MARK A. BODRON, PARTNER, BAKER BOTTS LLP, HOUSTON, TEXAS February 16, 2016 More employers are adopting safe harbor cash or deferral arrangements under Section 401(k) of the Internal Revenue Code (the Code ) 1 as they seek alternatives to simplify retirement plan administration, reduce overall administration costs, and increase the retirement savings of their workforce. However, based on formal guidance found in the Treasury regulations issued under Section 401(k), and informal comments made by representatives of the Internal Revenue Service (the Service ), there were limits on mid-year amendments to safe harbor 401(k) plans. Failure to understand and abide by these limits placed the qualified status of a safe harbor 401(k) plan in jeopardy. Unfortunately, the extent to which these limits applied was not clear and lead to much speculation and presumably impermissible mid-year amendments to safe harbor plans. 2 Thus, these limits presented challenges for plan sponsors who would like to make changes to their safe harbor plan after the beginning of the plan year, in particular in the context of corporate mergers and acquisitions, but were concerned that such actions would place the plan s safe harbor and qualified status at risk. In response to requests from plan sponsors and practitioners for clarity and guidance regarding the extent to which plan sponsors may make mid-year amendments to their safe harbor 401(k) plans 3 and not lose safe harbor status (or worse qualified plan status), on January 29, 2016, the Service issued Notice , Mid-Year Changes to Safe Harbor Plans and Safe Harbor Notices (the Notice ). This paper will review the history of the safe harbor 401(k) plan mid-year amendment issue, the relief provided by the Notice, and the open issues that remain with respect to corporate mergers and acquisitions that involve safe harbor 401(k) plans. 4 I. OVERVIEW OF SAFE HARBOR PLANS The safe harbor 401(k) plan was added to Section 401(k) by the Small Business Job Protection Act of 1996 ( SBJPA ) 5 as Section 401(k)(12) (referred to herein as a Traditional Safe Harbor Plan ). A Traditional Safe Harbor Plan is deemed to satisfy the actual deferral 1 References to a Section are to a section of the Code unless otherwise indicated. 2 To date, the Service has not published any information regarding the extent to which the Service has uncovered through audit or otherwise safe harbor plans that have been impermissibly amended mid-year. 3 See, e.g., American Bar Association Section of Taxation, Comments on Mid-Year Amendments to Safe Harbor 401(k) Plans (Aug. 31, 2015) ( ABA Comment ), 4 This paper is based on a presentation to the Department of the Treasury and the Service in May 2015 by the author and Susan A. Wetzel, Partner, Haynes & Boone, Dallas, Texas, with the assistance of Matthew J. Eickman, Director of ERISA Services, Lawing Financial, Inc., Overland Park, Kansas. The ABA Comment was submitted following that presentation. The ABA Comment is limited to possible approaches for addressing the safe harbor 401(k) plan mid-year amendment issue in non-corporate merger and acquisition situations. 5 Section 1433(a) of SBJPA, Pub. L , 110 Stat. 1755, enacted Aug. 20, Active

2 percentage test ( ADP test ) with respect to participants elective deferrals 6 if the plan, among other requirements, (i) makes either safe harbor matching contributions 7 or safe harbor nonelective contributions (collectively referred to herein as safe harbor contributions ), 8 (ii) provides for immediate vesting of the safe harbor contributions, 9 and (iii) complies with a notice requirement. 10 The SBJPA also added a safe harbor to Section 401(m) for the actual contribution percentage test ( ACP test ) with respect to matching contributions, as Section 401(m)(11). 11 The ACP test safe harbor requires, among other requirements, that the notice requirement in Section 401(k)(12) be met with respect to these safe harbor matching contributions. 12 In 2006, the Code was amended to add to an alternative safe harbor 401(k) plan for automatic contribution arrangements (referred to herein as a QACA and collectively with the Traditional Safe Harbor Plan referred to herein as a Safe Harbor Plan ). 13 Section 401(k)(13) provides that a QACA is deemed to satisfy the ADP test with respect to participants elective deferrals if the plan, among other requirements, (i) provides either safe harbor matching contributions 14 or safe harbor non-elective contributions, 15 (ii) employs automatic contributions of elective deferrals unless the employee elects otherwise, 16 (iii) provides for 100% vesting of the safe harbor contributions after two years of service, 17 and (iv) complies with a notice requirement. 18 An alternative safe harbor for the ACP test for matching contributions under a QACA was also added to the Code in Under Section 401(m)(12), the safe harbor for the ACP test under a QACA requires, among other requirements, that the notice requirement in Section 401(k)(13) be met with respect to these safe harbor matching contributions The term elective deferrals refers to both elective deferrals under Code 401(k) and Roth 401(k) contributions under Code 402A unless otherwise indicated. 7 A matching contribution of (i) 100% of the first 3% of a participant s compensation deferrals and (ii) 50% of the next 2% of a participant s compensation deferrals. Code 401(k)(12)(B)(i). 8 A non-elective employer contribution of at least 3% of an eligible employee s compensation. Code 401(k)(12)(C). 9 Code 401(k)(12)(E)(i). The safe harbor contribution must also be subject to the same withdrawal restrictions as elective deferrals. 10 Code 401(k)(12)(D). 11 Section 1433(b) of the SBJPA. The employer matching contribution may not be made with respect to employee contributions and elective deferrals in excess of 6% of the participant s compensation. Code 401(m)(11)(B)(i). Note that the ACP test safe harbor does not apply to non-roth after-tax contributions made by participants. 12 Code 401(m)(11)(A)(ii). 13 Section 902(a) of the Pension Protection Act of 2006 ( PPA ), Pub. L , 120 Stat. 780, enacted Aug. 17, A matching contribution of (i) 100% of the first 1% of a participant s compensation deferrals and (ii) 50% of the next 5% of a participant s compensation deferrals. Code 401(k)(13)(D)(i)(I). 15 A non-elective employer contribution of at least 3% of an eligible employee s compensation. Code 401(k)(13)(D)(i)(II). 16 The minimum automatic contribution rate is 3% and the maximum is 10% of compensation; provided, however, that if the contribution rate is less than 6%, the plan must provide that the percentage will increase 1% each plan year until it reaches 6% of compensation. Code 401(k)(13)(C)(iii). 17 Code 401(k)(13)(D)(iii). The safe harbor contribution must also be subject to the same withdrawal restrictions as elective deferrals. 18 Code 401(k)(13)(E). 19 Section 902(b) of the PPA. 20 Code 401(m)(12)(A). Active Mark A. Bodron 2016

3 A Safe Harbor Plan must provide a notice to each employee who is eligible to participate in the plan that is sufficiently accurate and comprehensive to inform the employees of their rights and obligations under the plan (referred to herein as a Safe Harbor Notice ). 21 The Safe Harbor Notice must be provided to eligible employees within a reasonable period of time before the beginning of the plan year or, in the year an employee becomes eligible, within a reasonable period before the employee becomes eligible. 22 While the Code does not require any specific content for the Safe Harbor Notice for a Traditional Safe Harbor Plan, the Safe Harbor Notice for a QACA must inform the employee of (i) the right not to have elective deferrals made to the plan, (ii) how the elective deferrals will be invested in the absence of an investment election, and (iii) a reasonable period of time after receiving the notice and before the first deferral is made to make either such election. 23 None of the Code provisions that describe the requirements for Safe Harbor Plan status expressly provide that such status is only available in full plan year increments, or that plans for which Safe Harbor Plan status has been selected are precluded from satisfying the 401(k) nondiscrimination requirements in any other manner for a plan year, if for any reason they fail to meet the Safe Harbor Plan requirements during that plan year. Nor does the Code expressly preclude Safe Harbor Plans from being amended mid-year. The Service issued final regulations under Section 401(k) and Section 401(m) in 2004 that address the requirements for Safe Harbor Plans. 24 The regulations require that an employer sponsor adopt a Safe Harbor Plan before the beginning of the plan year and maintain the plan as a Safe Harbor Plan throughout a full 12-month plan year, except as otherwise provided in regulations or guidance issued by the Service. 25 Consistent with the statute, the regulations provide that the Safe Harbor Notice must be provided within a reasonable period before the beginning of the plan year or, in the year an employee becomes eligible, within a reasonable period before the employee becomes eligible. 26 However, the regulations add that the notice will be deemed to be timely provided if it is given (i) to each eligible employee at least 30 days (and no more than 90 days) before the beginning of each plan year or (ii) if the employee becomes eligible for the plan after the 90th day before the beginning of a plan year, to the employee no more than 90 days before the employee becomes eligible (and no later than the date the employee becomes eligible). 27 The regulations set forth the following minimum content that must be included in the Safe Harbor Notice: 21 Code 401(k)(12)(A)(ii) & (D); Code 401(k)(13)(B) & (E). 22 Code 401(k)(12)(D); Code 401(k)(13)(E). 23 Code 401(k)(13)(E)(ii). 24 Treas. Reg (k)-3 & 1.401(m) Fed. Reg (Dec. 29, 2004). The final regulations were amended in 2009 and Fed. Reg (Feb. 24, 2009) & 78 Fed. Reg (Nov. 15, 2013).. 25 Treas. Reg (k)-3(e)(1). The regulation provides special rules for a new plan initially established after the first day of the plan year. Treas. Reg (k)-3(e)(2). 26 Treas. Reg (k)-3(d)(3)(i). 27 Treas. Reg (k)-3(d)(3)(ii). Active Mark A. Bodron 2016

4 (1) The safe harbor matching contribution or safe harbor non-elective contribution formula used under the plan, including a description of the levels of safe harbor matching contributions, if any, available under the plan; (2) Any other contributions under the plan or matching contributions to another plan on account of elective deferrals or employee after-tax contributions under the plan, including the potential for discretionary matching contributions, and the conditions under which such contributions are made; (3) The plan to which safe harbor contributions will be made if different than 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 deferral 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 a copy of the summary plan description and such information as telephone numbers, addresses and, if applicable, electronic addresses, of individuals or offices from whom employees can obtain such plan information. 28 II. LIMITED GUIDANCE ISSUED REGARDING MID-YEAR AMENDMENTS TO SAFE HARBOR PLANS The Code does not address, nor does it expressly preclude, mid-year amendments to a Safe Harbor Plan. The regulations, however, provide for mid-year amendments to a Safe Harbor Plan in two specific circumstances: 29 (i) a plan termination before the end of a plan year; 30 and (ii) a mid-year reduction or elimination of the safe harbor contributions. 31 The regulations permit a Safe Harbor Plan to make a mid-year amendment to reduce or eliminate the safe harbor contributions if: (1) The employer (i) is operating at an economic loss (as described in section 412(c)(2)(A)) for the plan year; or (ii) includes in the Safe Harbor Notice a statement that the plan may be amended during the plan year to reduce or suspend safe harbor matching or non-elective contributions, as applicable, and that the 28 Treas. Reg (k)-3(d)(2)(ii). 29 While the regulations do mention two specific circumstances where mid-year amendments are permitted to a Safe Harbor Plan, both of these circumstances involve amendments that would reduce or terminate the safe harbor contributions. There is no express prohibition in the regulations regarding other mid-year amendments. 30 Treas. Reg (k)-3(e)(4). 31 Treas. Reg (k)-3(g). Active Mark A. Bodron 2016

5 reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension; 32 (2) All eligible employees are provided a supplemental notice that describes (i) the consequences of the amendment that reduces or suspends future safe harbor contributions; (ii) the procedures for changing elective deferral and after-tax contribution elections; and (iii) the effective date of the amendment (the Supplemental Notice ); 33 (3) The reduction or suspension is effective no earlier than the later of (i) the date the amendment is adopted implementing the change or (ii) 30 days after eligible employees are provided the Supplemental Notice; (4) Eligible employees are given a reasonable opportunity (including a reasonable period after receipt of the Supplemental Notice) prior to the reduction or suspension to change their elective deferral and after-tax contribution elections; and (5) The plan (i) is amended to provide that the ADP test will be satisfied for the entire plan year in which the reduction or suspension occurs using the current year testing method; and (ii) satisfies the Safe Harbor Plan requirements in the regulations with respect to amounts deferred through the effective date of the amendment. 34 Outside the regulations, the Service has provided guidance permitting mid-year amendments to Safe Harbor Plans in very limited situations: Announcement clarified that a Safe Harbor Plan may be amended after the first day of the plan year to add a Roth 401(k) feature or to allow hardship withdrawals. The Service noted that it was responding to employer concerns about adding such provisions mid-year and requested comments as to whether additional guidance was needed with respect to mid-year amendments. Notice allowed a Safe Harbor Plan to be amended to add in-plan Roth transfers mid-year, provided the amendment was adopted no later than December 31, The mid-year amendment issue was not addressed by the Service. Notice allowed a Safe Harbor Plan to be amended mid-year to reflect the expanded eligibility for in-plan Roth transfers permitted under the American Taxpayer Relief Act of 2012, Pub. L , provided the amendment was adopted no later than December 31, The Service stated that Safe Harbor Plans generally are prohibited from making mid-year changes to plan provisions that satisfy [Treasury Regulation] 1.401(k) Clause (1) applies for plan years beginning on and after January 1, 2015 with respect to safe harbor matching contributions. 78 Fed. Reg (Nov. 15, 2013). 33 Treas. Reg (k)-3(g)(2). 34 Treas. Reg (k)-3(g)(1). Active Mark A. Bodron 2016

6 Notice allowed a Safe Harbor Plan to be amended to comply with the United States Supreme Court s ruling on same-sex marriages in United States v. Windsor. 35 The Service repeated the requirement the regulations that Safe Harbor Plans generally must be adopted before the beginning of the plan year and be maintained throughout a full 12-month plan year. Neither the regulations nor other guidance issued by the Service expressly states that mid-year amendments are not permitted except as permitted by the Service. To the contrary, the regulations indicate that certain mid-year amendments are permitted without express approval of the Service. Treasury Regulation section 1.401(k)-3(e)(1) states, in pertinent part, that a plan which includes provisions that satisfy the rules of [Treasury Regulation section 1.401(k)-3] will not satisfy the requirements of 1.401(k)- 1(b) if it is amended to change such provisions for that plan year. 36 Use of the phrase such provisions should limit the restriction on mid-year amendments only to changes to a plan s safe harbor contribution provisions. Yet, representatives of the Service informally stated that only mid-year amendments to a plan expressly provided for by the regulations or guidance issued by the Service are permitted. The Service indicated informally that its position is based on the Code s Safe Harbor Notice requirement. That is, that no changes may be made to the plan (unless with Service approval) after eligible employees are provided the notice that describes the Safe Harbor Plan s features because employees rely on the notice to make their decisions regarding participation in the plan for that plan year. Moreover, the Service appeared be interpreting this rational to apply to features of the plan that are not described in the Safe Harbor Notice. Finally, prior to issuance of Notice , many practitioners assumed that a mid-year amendment to a Safe Harbor Plan to reflect changes in legal requirements (at least changes resulting from the fact that a law was found unconstitutional by the Supreme Court) would be permissible without issuance of guidance by the Service. However, following the issuance of Notice , there is concern that the prohibition on mid-year amendments without Service approval may extend even to such situations. III. THE MID-YEAR CHANGE DILEMMA Because of the lack of official guidance issued by the Service specific to the issues of mid-year amendments, coupled with the unofficial statements made by representatives of the Service, many practitioners were reluctant to make any mid-year amendments to a Safe Harbor Plan, including changes that did not concern the safe harbor features of the plan. 37 Changes to increase the safe harbor contributions that would benefit employees, such as increasing the matching contribution amount, were not made by employers due to the same concern. If the S.Ct (2013). 36 Emphasis added. 37 The lack of guidance expressly addressing the limits of mid-year amendments to Safe Harbor Plans likely resulted in many plan sponsors and consultants making mid-year changes to a Safe Harbor Plan and not realizing they may have jeopardized the safe harbor status of the plan. Active Mark A. Bodron 2016

7 prohibition was in fact a comprehensive prohibition, then did that mean, for example, that a change in the trustee or the types of investments permitted under the plan and trust document would trigger a loss of safe harbor status? What about a change in the number of plan loans that may be outstanding at any time from one to two loans or amending the plan to allow in-kind rollovers of plan loans from another plan? The number and type of amendments that would be covered by such a broad prohibition are virtually limitless, and many of them would have little, if any, relationship to the core statutory Safe Harbor Plan requirements. Unfortunately, even if a plan sponsor did not intend to amend a Safe Harbor Plan midyear, employers frequently face issues that occur in the day-to-day operations that require changes to the plan from time to time prior to the end of the plan year, such as corporate transactions or changes in third party administrators ( TPAs ) or trustees. The reality is that many Safe Harbor Plans today are maintained by small and mid-sized employers who adopt and operate the plans without the benefit of legal review. With the increased use of master and prototype plan documents, plan sponsors often simply sign the adoption agreement that has been completed by the TPA without the counsel of an attorney. Anecdotal evidence suggests that, while it is the case that these small and mid-size employers do not engage legal counsel review due to a lack of funds to pay for such counsel, in many cases it appears that no external legal review occurs because the employers do not realize that the adoption agreement and base plan document are legal documents warranting legal review. TPAs inform the employer that the plan document form has been approved by the Service and no changes are permitted. The TPAs then complete the adoption agreement for the employer, and while some TPAs might walk-through the completed adoption agreement with the employer, generally there is never a discussion of the lengthier base plan document and the implications of making changes to the plan after the beginning of the plan year. In a perfect world, a change in the TPA for Safe Harbor Plans would occur only at the end of a plan year. The reality is that these changes typically occur mid-year, and the new TPA may require the plan sponsor to use its master and prototype plan. Rarely are two master and prototype plans sponsored by different TPAs identical in form. Adoption agreements often vary wildly in the elections that are available depending upon the platforms offered by the third party administrator. Even if the adoption agreements are similar, the base plan documents also vary greatly by provider. For example, one base plan document might provide that distributions and withdrawals from the Plan will be taken first from the participant s Roth deferral account and then from his pre-tax elective deferral account, while the next might provide that distributions are taken equally from both Roth and pre-tax elective deferral accounts. These types of differences are buried in the base plan document and, unless the employer compares each of the base plan documents, are extremely difficult to find. If the employer does find differences between the adoption agreements and base plan documents, there was and is often nothing the plan sponsor can do about it, short of refusing to change plan administrators. Adopters of prototype plans generally have no ability to customize the plan document. Since a change in TPAs is often triggered by either a need for better service or a desire to reduce plan fees and costs (often which are born by the participants), plan sponsors often felt that they are trapped between two bad choices (i) face a breach of fiduciary duty claim if they remain with a TPA who is either providing bad service or charging higher fees or (ii) risk Active Mark A. Bodron 2016

8 disqualification by adopting a new prototype plan that results in mid-year amendments to a Safe Harbor Plan. IV. EFFECT OF AN IMPERMISSIBLE MID-YEAR AMENDMENT In the event a plan sponsor made a mid-year amendment to a Safe Harbor Plan that was not permitted by either the regulations or guidance, the risk plan sponsors face is that the Service would treat the amendment as an impermissible amendment that would eliminate the plan s safe harbor status for the year in which the amendment occurred and potentially the plan s qualified status. The Service most likely would not discover the mid-year amendment until the plan sought a determination letter (less likely with the end of the cycle program) or the Service reviewed the plan document on audit, which would be after the plan year in which the mid-year amendment was made. Safe Harbor Plans cannot include default ADP testing and ACP testing in the event of a failure to maintain safe harbor status. The plan sponsors cannot simply run the nondiscrimination testing for the year of the mid-year amendment without first retroactively amending the plan. Arguably, the plan sponsor may be able to retroactively amend the plan to include ADP testing and ACP testing for the year of the mid-year amendment. But if the issue is discovered on audit, the plan sponsor would not be able to voluntarily correct under the Employee Plans Compliance Resolution System 38 but instead would be subject to Audit Cap (and the higher sanction costs) for correction, and then hopefully, be able to gather the data necessary in order to run the testing for the year the mid-year amendment occurred. V. POSSIBLE APPROACHES REGARDING MID-YEAR AMENDMENTS PRIOR TO THE NOTICE OTHER THEN IN THE CASE OF MERGERS & ACQUISITIONS Prior to the Notice, it appears that there were at least three possible approaches the Service could take to address mid-year amendments of Safe Harbor Plans relating to changes other than in connection with mergers and acquisitions (which are discussed in more detail in Section VII below). A. Prohibition of All Mid-Year Amendments The first approach would be to treat all mid-year amendments as prohibited other than those specifically permitted in the regulations or in issued guidance. This approach is problematic for a number of reasons. First, this approach does not appear to have statutory support and, further, appears counter to the language of the regulations. As discussed above, the language in Treasury Regulation section 1.401(k)-3(e)(1) suggests that only amendments to the safe harbor provisions are prohibited, and Treasury Regulations section 1.401(k)-3(e)(4) and Treasury Regulation section 1.401(k)-3(g) both permit changes to the safe harbor provisions of the plan. Thus, the regulations do not prohibit all mid-year amendments. 38 Rev. Proc Active Mark A. Bodron 2016

9 Second, this approach adds an increased burden on the Service to anticipate and provide guidance regarding every single type of mid-year amendment that needs to be made to Safe Harbor Plans, similar to the guidance it had to provide regarding the Windsor decision. As mentioned previously, the types of amendments that may be made are virtually limitless, so even if resources were available to provide this guidance, it would likely be impossible for the Service to anticipate every possible amendment that could be made. Third, this approach prevents plan sponsors from changing TPAs and trustees mid-year. Such a restriction would place plan sponsors in a position of continuing with a service provider that is providing substandard service or excessive fees until the end of a plan year, potentially violating ERISA fiduciary duty requirements in the process. Fourth, this approach prevents employers from making plans better for participants during a plan year. For instance, if an employer wanted to add a discretionary contribution to the plan in addition to the safe harbor (an employee favorable change), it would not be able to do so. Further, an employer could not reduce the length of the vesting schedule or add or enhance participant loans, hardship distributions or other in-service distributions to the plan all items that would be beneficial for participants. It is important to note that in most plans, participants have the ability to modify their deferral elections (or even cease making deferrals) at any time, which would give the participants the choice to opt out of the plan if they did not like any new feature added. B. Prohibition of Mid-Year Amendments to Safe Harbor Features Described in the Safe Harbor Notice A second approach would be to prohibit mid-year amendments that affect the plan s safe harbor features described in the Safe Harbor Notice, unless otherwise permitted by the Service. Under this approach, an employer would be able to make mid-year amendments to the plan that do not impact the safe harbor features (subject to the prohibitions under Section 411(d)(6) anticutback restrictions). This approach offered a number of benefits, but also was not without concerns. As discussed above, the regulations set forth minimum content that must be included in the Safe Harbor Notice. The regulations require the Safe Harbor Notice to describe the safe harbor matching or non-elective contribution formula and other information directly related to compliance with the safe harbor requirements under the Code and regulations for the plan year. However, the regulations also require the notice to include other information about the plan that is not directly related to the safe harbor features. For example, the information regarding withdrawals, other than the withdrawal restrictions that must apply to the safe harbor contributions, and obtaining plan information are clearly not related to the safe harbor formula, but are required under the regulations to be included in the notice. As noted, informally representatives of the Service had stated that that the reason behind the Safe Harbor Notice is to provide participants with the key information they need in order to make a decision to participate in the Safe Harbor Plan for the upcoming plan year. Arguably, if the prohibition on mid-year amendments was crafted to prevent these provisions mentioned in Active Mark A. Bodron 2016

10 the Safe Harbor Notice from changing, the information that the participants relied upon in making their election would remain constant for a plan year. There are numerous provisions of a plan, however, that arguably do not impact a participant s decision whether he or she should defer or contribute compensation to the plan for a plan year, despite the fact that some of them may be described in the Safe Harbor Notice. Example of changes to these plan features that arguably would not impact an employee s decision regarding participation include, for example: 1. A change in the plan trustee (either by appointment of a new trustee or acquisition of the trustee by another entity) or changes to any trust provisions (such as investments or investment classes) contained in the plan document; 2. A change in the plan committee members or powers and duties of the plan committee; 3. Changes to the claims procedures; 4. Changes to provisions regarding right to recoupment of overpayments; 5. A change that expands the class of employees eligible to participate in the plan; 6. Adoption of the plan by an affiliated employer that joins the controlled group of the plan sponsor during a plan year as a result of a corporate merger, or a stock or asset acquisition; 7. Changes in third party administrators that require restatement of the plan on a new master and prototype plan document. Many of changes described above are back room items related to the operation of the plan that participants will have little or no concern or interest in. Moreover, even to the extent participants might view such changes as meaningful, in our experience they would be significantly less likely to impact participant contribution behavior than changes in the safe harbor formula. This second approach appears consistent with Treasury Regulation section 1.401(k)- 3(e)(1). However, without specific guidance from the Service there would be a risk that a midyear change would be viewed by the Service as indirectly impacting the plan s safe harbor features, thereby jeopardizing safe harbor status. C. Prohibition of Mid-Year Amendments that Cause the Plan to No Longer Have a Safe Harbor Formula A third approach would be to prohibit mid-year amendments that change the plan provisions that are required for safe harbor status. That is, an amendment to the vesting provisions, safe harbor matching contributions or non-elective contributions formula, or, in the case of a QACA, the automatic contribution features that are in place for the plan year that changes these provisions in a manner that would not satisfy the safe harbor requirements or Active Mark A. Bodron 2016

11 would reduce the level of matching contributions, non-elective contributions, or automatic contributions under the arrangement. This approach would provide some additional flexibility to employers, while preserving the core safe harbor provisions in the Safe Harbor Plan. This third approach appears to be supported by the statute and the language in Treasury Regulation section 1.401(k)-3(e)(1). 39 VI. MID-YEAR AMENDMENTS UNDER THE NOTICE A. Overview of the Scope of the Notice The Notice provides guidance on mid-year amendments (referred to as mid-year changes in the Notice) to Safe Harbor Plans that are not addressed by the Treasury Regulations. It is effective for mid-year amendments made on and after the issuance date of the Notice, January 29, The Notice also revokes Announcement , which addressed the addition of a Roth 401(k) feature or allowance of hardship withdrawals mid-year to the Safe Harbor Plan (which is effectively superseded by the Notice). The Notice arguably goes further than the approaches discussed above and should provide plan sponsors with a lot of flexibility to make mid-year amendments without the loss of safe harbor status. The Notice explains that Treasury Regulation section 1.401(k)-3(e)(1) provides that to be a Safe Harbor Plan, the plan provisions must satisfy the safe harbor plan rules of Treasury Regulations section 1.401(k)-3, which must be adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. 40 The Notice defines a mid-year amendment or change to be a change to a Safe Harbor Plan that is: (1) First effective during a plan year rather (other than the first day of the plan year); or (2) Effective as of the beginning of the plan year, but adopted after the beginning of the plan year. The Notice defines required safe harbor notice content to be information that is required by the regulations to be provided in a plan s Safe Harbor Notice Amendments requiring Service approval would be limited to the requirements in the regulations, which include, among others: (1) safe harbor contributions exempting the plan from ADP testing and, if applicable, ACP testing, Treas. Reg (k)-3(b) & (c); (2) adding a plan provision that results in the ratio of matching contributions made on account of an highly compensated employee s elective contributions for a plan year to those elective contributions being greater than the ratio of matching contributions to elective contributions that would apply with respect to any eligible non-highly compensated employee with elective contributions at the same percentage of compensation, Treas. Reg (k)-3(c)(4); (3) plan provisions that impose permissible restrictions on elective contributions made by non-highly compensated employees for a plan year, such as limitations on frequency of deferral election changes, limitations on the amount of deferrals that can be made during a plan year, limitations on the types of compensation that can be deferred during a plan year, and restrictions needed to satisfy statutory limits, such as under Section 402(h) or Section 415, Treas. Reg (k)-3(c)(6); (4) vesting provisions, Code 401(k)(12)(E)(i) & (13)(D)(iii); and (5) distribution options available for safe harbor contributions, id. 40 The Notice provides that those required safe harbor provisions are changed during the 12-month plan year, the plan will not satisfy the non-discrimination testing requirements for 401(k) plans. Notice , Section II.B. 41 See pp. 3-4 for a list of the required content for the Safe Harbor Notice in the regulations. Active Mark A. Bodron 2016

12 As indicated above, the Notice makes clear that it does not apply to mid-year amendments that are addressed in, and have specific requirements under, the regulations. Accordingly, the Notice cannot be relied upon to made the following changes: (1) The adoption of a short plan year or any change to the plan year, which is permitted only as described in Treasury Regulation sections 1.401(k)-3(e)(2), (3), and (4) and 1.401(m)-3(f)(2), (3), and (4); (2) The adoption of safe harbor plan status on or after the beginning of the plan year, which is permitted only as described in Treasury Regulation sections 1.401(k)- 3(f) and 1.401(m)-3(g); and (3) The reduction or suspension of safe harbor contributions or changes from Safe Harbor Plan status to non-safe Harbor Plan status (and thus must satisfy ACP and ADP testing for the plan year the change is made), which is permitted only as described in Treasury Regulation sections 1.401(k)-3(g) and 1.401(m)-3(h)). The Notice further cautions that other applicable laws may affect the ability of a plan sponsor to make mid-year amendments, such as, for example, the 411(d)(6) anti-cutback restrictions, the non-discrimination rule under Section 401(a)(4) and the anti-abuse provisions under Treasury Regulation section 1.401(k)-1(b)(3). B. Conditions for Permissible Mid-Year Amendments to a Safe Harbor Plan Under the Notice, a mid-year amendment to a Safe Harbor Plan or to the plan s Safe Harbor Notice does not violate the safe harbor rules, and thus continue to have safe harbor status, if: (1) with respect to a change to the required safe harbor notice content, certain notice and election opportunity conditions are satisfied; and (2) The change to the plan is not a prohibited mid-year change. 42 The Notice makes clear that the additional notice or election opportunities are not required if the mid-year amendment changes information that is in a plan s Safe Harbor Notice, but that information is not required safe harbor notice content. Change to Required Safe Harbor Notice Content. If the mid-year amendment results in a change to the required safe harbor notice content, an updated Safe Harbor Notice that describes the mid-year amendment and its effective date must be provided to each employee otherwise required to be provided a Safe Harbor Notice within a reasonable period before the effective date of the change. Whether this timing requirement is met is based on all of the relevant facts and circumstances, but the timing requirement is deemed to be satisfied if the updated Safe Harbor Notice is provided at least 30 days (and not more than 90 days) before the effective date of the 42 Notice , Section III. The Notice s mid-year amendment rules apply on similar terms to Code 403(b) plans that apply the Code 401(m) safe harbor rules pursuant to Code 403(b)(12). See Notice , Section IV. Active Mark A. Bodron 2016

13 change. If it is not practicable for the updated Safe Harbor Notice to be provided before the effective date of the change (for example, in the case of a mid-year change to increase matching contributions retroactively for the entire plan year), the updated notice will be timely if it is provided as soon as practicable after, but not later than 30 days after, the date the change is adopted. Note that if the required information about the mid-year change and its effective date was provided with the pre-plan year annual Safe Harbor Notice, no updated Safe Harbor Notice is required. 43 Reasonable Election Opportunity. An employee required to be provided an updated Safe Harbor Notice as described above, must also be provided a reasonable opportunity (including a reasonable period after receipt of the updated notice) before the effective date of the mid-year amendment to change his or her pre-tax deferral election and/or after-tax employee contribution election. Again, a 30-day election period is deemed to be a reasonable period to change such election(s). If it is not practicable for the election opportunity to be provided before the effective date of the change, the reasonable opportunity requirement will be satisfied if the election opportunity begins as soon as practicable after the date the updated notice is provided to the employee, but not later than 30 days after the date the change is adopted. 44 C. Prohibited Mid-Year Amendments Unless required by applicable law, be it a statutory law change or a court decision, the following mid-year amendments are not permitted to be made under the Notice: A mid-year change to increase the number of completed years of service required for an employee to have a non-forfeitable right to the employee s account balance attributable to safe harbor contributions under a QACA pursuant to Treasury Regulation sections 1.401(k)-3(k)(3) or 1.401(m)-3(a)(2); 2. A mid-year change to reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contribution; provided, however, that this prohibition does not apply to an otherwise permissible change under eligibility service crediting rules or entry date rules made with respect to employees who are not already eligible (as of the date the change is either made effective or is adopted) to receive safe harbor contributions under the Safe Harbor Plan; 3. A mid-year change to the type of Safe Harbor Plan, such as changing from a Traditional Safe Harbor Plan to a QACA; and 4. A mid-year amendment (i) to modify (or add) a formula used to determine matching contributions (or the definition of compensation used to determine matching contributions) if the change increases the amount of matching contributions, or (ii) to permit discretionary matching contributions; provided, however, that this prohibition does not apply if, at least three months prior to the 43 Notice , Section III.C. 44 Id. 45 Notice , Section III.D. Active Mark A. Bodron 2016

14 end of the plan year, the change is adopted and the updated Safe Harbor Notice and election opportunity are provided, and if the change is made retroactively effective for the entire plan year (which may require a plan that provides for periodic matching contributions as described in Treasury Regulation sections 1.401(k)-3(c)(4) and (5)(ii) and/or 1.401(m)-3(d)(4) to be amended to provide for matching contributions based on the entire plan year). Also, as discussed above, the mid-year changes expressly addressed in the regulations must meet the requirements of the regulations and may not rely on the Notice. D. Examples The Notice provides a number of examples. 46 Example 1: The employer makes a mid-year amendment to a Traditional Safe Harbor Plan to increase future safe harbor non-elective contributions from 3% to 4% for all eligible employees. Employees otherwise required to be provided a Safe Harbor Notice are provided both an updated notice that describes the increased contribution percentage and an additional election opportunity in accordance with the requirements of the Notice. The mid-year amendment does not cause the plan to lose safe harbor status. Example 2: The employer makes a mid-year amendment to a Traditional Safe Harbor Plan to decrease safe harbor non-elective contributions from 4% to 3% for all eligible employees. This type of change is addressed in the regulations. If the reduction meets the requirements of regulations, the plan is no longer a Safe Harbor Plan and is required to satisfy ADP Testing or other non-discrimination standards. 47 If the reduction does not meet the requirements of the regulations, the plan as amended does not satisfy the participation and nondiscrimination requirements for a 401(k) plan under Section 401(k)(3), and potentially faces potential loss of qualified plan status. Example 3: The employer makes a mid-year amendment on August 31 to a Traditional Safe Harbor Plan that makes safe harbor matching contributions on a payroll period basis to (1) increase the safe harbor matching contribution from 4% to 5% retroactive to January 1 and (2) make the match on a plan year basis. Due to the retroactive effective date of the change, it is not practicable for the plan to provide an updated Safe Harbor Notice and additional election opportunity to employees prior to the January 1 effective date. On September 3, the first date that an updated notice and additional election opportunity can practicably be provided, employees otherwise required to be provided a Safe Harbor Notice are provided an updated notice that describes the increased contribution percentage and an additional 30-day election period starting September 3. The mid-year amendment does not cause the plan to lose safe harbor status. Example 4: The employer makes a mid-year amendment to a Safe Harbor Plan to add an age 59½ in-service withdrawal feature. Employees otherwise required to be provided a Safe Harbor Notice are provided both an updated notice that describes the withdrawal feature and an 46 Notice , Section III.E. 47 Treas. Reg (k)-3(g). Active Mark A. Bodron 2016

15 additional election opportunity. The mid-year amendment does not cause the plan to lose safe harbor status. Example 5: The employer makes a mid-year amendment to a QACA with multiple investment options to change in the plan s default investment fund from Fund X to Fund Y. Employees otherwise required to be provided a Safe Harbor Notice are provided both an updated notice that describes Fund Y as the default investment fund and an additional election opportunity. The mid-year amendment does not cause the plan to lose safe harbor status. Example 6: The employer makes a mid-year amendment to a Traditional Safe Harbor Plan to change the design to a QACA. This is prohibited change under the Notice. The plan as amended does not satisfy the participation and non-discrimination requirements for a 401(k) plan under Section 401(k)(3), thus a qualified issue. However, if the employer had made a mid-year amendment to add an automatic contribution feature rather than a QACA and employees otherwise required to be provided a Safe Harbor Notice had been provided both an updated notice that described the automatic contribution arrangement and an additional election opportunity, then the mid-year amendment would not cause the plan to lose safe harbor status. Example 7: The employer makes a mid-year amendment to a Safe Harbor Plan to change the entry date for commencement of participation of employees who meet the plan s minimum age and service eligibility requirements from monthly to quarterly. The amendment also changes plan rules regarding arbitration of disputes. The amendment is effective with respect to employees who are not already eligible to participate in the safe harbor plan. The safe harbor notice is not required to include the plan entry date or information on arbitration procedures; therefore, an updated notice and additional election opportunity are not required. The mid-year amendment does not cause the plan to lose safe harbor status. VII. MID-YEAR AMENDMENTS AND CORPORATE MERGERS AND ACQUISITIONS Plan sponsors of all types of retirement plans routinely enter into transactions to acquire new entities, to sell subsidiaries, to merge with and into other entities and to be acquired by another entity. Rarely do these corporate transactions occur on the last day or first day of a plan year. It is common for the acquiror to insist that the target company terminate its defined contribution plans one business day prior to the closing date. This typically results in leakage from the retirement plan system, as employees cannot be forced to rollover their plan balances to the acquiror s plan. If the acquiror sponsors a Safe Harbor Plan, this further supports a decision to terminate the target s plan lacking guidance that would allow for the Safe Harbor Plan to be merged with another plan mid-year. 48 The Notice does not address mid-year amendments in connection with a corporate transaction. In fact, it appears that some of the mid-year changes that are prohibited in the Notice will preclude such amendments. At the end of the Notice, the Service requests comments on additional guidance that may be needed, in particular with respect to mid-year amendments to 48 An alternative approach is to maintain both plans for the remainder of the year. However, many plan sponsors do not choose this alternative due to administrative and cost issues. Active Mark A. Bodron 2016

16 Safe Harbor Plans in the context of a merger or acquisition. 49 The Notice, which very helpful in non-merger and acquisition situations, falls short of addressing the merger and acquisition issues that arise when there are two or more Safe Harbor Plans maintained by the parties to the transaction and the desire would be to merge rather than terminate plans (thereby avoiding the leakage issues). Lacking specific guidance on plan mergers in connection with a corporate transaction, provided below are summaries of common scenarios involving Safe Harbor Plans and musing about the approaches that might work to promote plan mergers. along with the potential issues. A. Merger of Two Safe Harbor Plans with Same Safe Harbor Contribution Formulas and Same Plan Years If there are two Safe Harbor Plans that have the same type of safe harbor contributions for example, both provide an enhanced safe harbor matching contribution formula and have the same plan year, and such plans satisfy the safe harbor rules prior to the consummation date of the transaction ( closing date ), then it would appear to be appropriate for the Service to provide that if the plans are merged as part of the transaction, 50 then the surviving Safe Harbor Plan should not lose safe harbor status merely due to the plan merger. Arguably, the merger would not impact any of the safe harbor provisions, and would not change any of the information contained in either of the plans Safe Harbor Notices that is specific to the safe harbor provisions, but would impact the name of the plan sponsor and perhaps other non-substantive provisions. If one Safe Harbor Plan has a better benefit than the other for example, one plan provides the basic safe harbor matching contribution formula and the other plan provides the enhanced safe harbor matching contribution formula the solution is not as clear. Perhaps the best approach in this case would be for the Service to require that the merged plan must use the better formula. Would that be for the remainder of the merger year or would the Service require retroactive application of the better formula following the approach under the Notice? What is the plan merger is effective less than 3 months from the end of the plan year (which is a problem under the Notice)? In either case, it seems that buyer would want to consider the cost (and if that cost is too much, then we are back to shutting down plans and leakage). The analysis can be further complicated, however, by the particular terms of each plan. For example, what if the plans have substantially different definitions of compensation that is used to determine the safe harbor contribution? Would the Service require that the better compensation definition must be used in either case described above? B. Merger of Two Safe Harbor Plans with Different Safe Harbor Contribution Formulas and Same Plan Years If the Safe Harbor Plans have different safe harbor contribution formulas one plan provides safe harbor matching contributions and the other plan provides safe harbor non-elective contributions even though they have the same plan year, a plan merger is admittedly 49 Notice , Section IV (comments are also requested with respect to plans that include an eligible automatic contribution arrangement under Code 414(w)). 50 For this purpose, it is assumed that the plan merger is provided for in the transaction agreement. Active Mark A. Bodron 2016

17 problematic. It appears that a plan merger in this situation would not be permitted under the Notice (i.e., no mid-year changes to the type of Safe Harbor Plan). However, if both plans satisfy the safe harbor rules prior to the closing date, the Service could provide an exception to the no change in type rule in the case of corporate transactions. One approach may be to provide that the employees continue to be eligible for the safe harbor contributions in place immediately prior to the closing date. Thus, the safe harbor matching contributions would continue for those employees covered under the Safe Harbor Plan that uses the matching formula, and the safe harbor non-elective contributions would be available for those employees covered under the Safe Harbor Plan that uses the non-elective formula (including the ability not to provide the contributions if the notice associated with the nonelective contributions permitted it not to be made). For new employees hired after the closing date who were not employed by seller immediately prior to the closing date, the Service could provide that the employees will be eligible for the safe harbor contributions associated with the line of business, division or subsidiary that is available to similarly situated employees for the remainder of the merger year. An alternative approach to the new employee issue would be to require that they be covered either under the better formula or the surviving plan s formula. Again, as indicated in Paragraph A above, specific plan terms, such as differences in the definition of compensation, further complicate the issue. C. Merger of Two Safe Harbor Plans with Different Plan Years If the Safe Harbor Plans have different plan years, in addition to the discussion in Paragraph A and Paragraph B above when he plans have the same or different contribution formulas, perhaps an approach the Service could consider to retain safe harbor status for both plans in this situation would be to treat one of the plans as having its plan year ending as of the closing date and thus having a short plan year. Note that the regulations address changes in plan years for Safe Harbor Plans and thus it seems that any guidance addressing plan mergers in this situation would need to either be consistent with those provisions or the Service would need to amend the regulations (which is a more difficult path for the Service to take). D. Merger of Safe Harbor Plan with Non-Safe Harbor Plan and Same Plan Years In this scenario, since one of the plans is not a Safe Harbor Plan, this situation appears to be the most challenging for the Service to develop guidance that would permit the Safe Harbor Plan to retain its safe harbor status. One approach to consider would be to permit the Safe Harbor Plan to (i) accept a mid-year trust-to-trust transfer from the non-safe Harbor Plan; (ii) amend its terms mid-year to cover the newly acquired entity; and (iii) amend its terms mid-year to protect any benefits being transferred from the non-safe Harbor Plan. An issue (among many) is whether the Service would require some form of ADP testing and/or ACP testing for the non- Safe Harbor Plan for the partial plan year prior to the closing date. Active Mark A. Bodron 2016

18 VIII. CONCLUSION The Notice is welcome relief for plan sponsors and practitioners who offer and work with Safe Harbor Plans. The Service should be commended for providing plan sponsors with the certainty and flexibility to make changes to their plans mid-year without the fear of loss of safe harbor status or worse loss of qualified plan status. There continues to be uncertainty, however, with respect to plan mergers in the connection with corporate transactions. Despite the flexible guidance provided by the Service in the Notice, the author believes that practitioners will continue to be hesitant to merge Safe Harbor Plans in most merger and acquisition situations. Hopefully, the Service will provide guidance that addresses the corporate transaction issues in the near future in a way that permits plan mergers without loss of safe harbor status in certain situations. Active Mark A. Bodron 2016