Perry-and-AssocThe IRS has been very restrictive about making mid-year changes to a Safe Harbor 401(k) Plan. However, IRS Notice 2016-16, effective January 29, 2016, eliminated most of these restrictions for both safe harbor 401(k) and 403(b) plans.

Almost everything is allowed if an updated safe harbor notice describing the mid-year change and its effective date is provided to employees within 30 days prior to the effective date of the mid-year change. In the case of a retroactive change, an opportunity to change a deferral election must be provided as soon as possible but not later than 30 days after the change is adopted.

Certain changes are prohibited:

• Increasing the length of service to fully vest in safe harbor contributions under a Qualified Automatic Contribution Arrangements (QACA)
• excluding employees eligible to receive safe harbor contributions;
• a change to the type of safe harbor plan;
• a change to modify matching contributions or the compensation used to determine the match, unless it is made at least 3 months prior to the end of the plan year, an updated safe harbor notice is provided, and the change is retroactive to the beginning of the plan year.

Certain changes were permitted prior to this ruling and still remain in place:

The 2004 final 401(k) regulations permitted a mid-year amendment to terminate the plan. In 2007 the IRS permitted adding a Roth deferral feature mid-year, and allowing hardship distributions for a plan beneficiary.


Defined Benefit Pension Plans (DB) offer higher allowable contributions and tax deductions for higher paid employees and owners. This can be of particular interest to Partnerships. In a traditional DB Plan, a typical maximum contribution amount (by age) might be:

Partner Age 45: $57,235; Partner Age 50: $106,617; Partner Age 55: $183,295

Although this can be very attractive in some situations, many Partnerships may feel that having this large disparity between partners’ benefits is not something they want. Instead of a traditional DB Plan, they may want to consider a Cash Balance Plan (CB).

When designing DB Plans for partnerships, often the partners wish to have contributions that are either equal to the other partners’ or very different from the other partners’ amounts. This is very difficult to accomplish with a traditional DB Plan. A CB Plan can offer tremendous opportunities and flexibility in these situations. A CB Plan can be designed to give each of the partners an equal dollar amount. Using the prior example, noting that maximum limits are still in place, instead of having the large disparity in a traditional DB Plan, each of the 3 partners could receive the same $50,000 contribution benefit.

Another typical design problem occurs when partners want very different contribution amounts. One partner might want the highest contribution/tax deduction available, another might have a high mortgage and two kids in college so they want a very small contribution and a third partner might want something in the middle. All of this can easily be handled in the Cash Balance Plan. Again referencing the earlier example, a CB Plan might offer the following:

Partner Age 45: $55,000; Partner Age 50: $45,000; Partner Age 55: $150,000

As in all retirement plans, the non-highly compensated employees of the company must also be included in the plan once they meet the age and service requirements for plan participation. The CB Plan can be designed to minimize the contributions to these employees.


When are employee deferred compensation contributions required to be deposited, and when do late deposits need to be reported and corrected? This depends on whether you are a “small” plan or a “large” plan. A “small” plan is a plan with less than 100 participants. All plans with a Cash or Deferred Agreement (CODA) must make employee deposits as soon as administratively feasible. If your procedures allow for deposits to be made in 3 days, you must make them in 3 days. However, for “small” plans, the DOL has issued safe-harbor regulations that any deposit made within 7 business days of a pay date will not be considered late no matter your procedures or normal deposit timeliness. This safe-harbor does not apply to “large” plans.

So what happens if a deposit is late? The plan sponsor must report the late deposits on the Form 5500, file a Form 5330, and ‘replace’ the earnings the participant(s) would have made had the deposit been made on time. In addition, there is a 15% penalty on those earnings. A red flag could be raised with the IRS or DOL if there is an ongoing history of late deposits increasing the likelihood of an audit, which could get very costly.

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Peery & Associates, Inc. is a retirement plan consulting and third-party administration firm based in the Bay Area providing services for all retirement plans including 401(k), 403(b) and Defined Benefit Plans