401(k) Amendment Rules – A Guide for Employers

Written by Eric Droblyen | Jul 30, 2024 7:05:00 PM

401(k) plans must operate according to the terms of a written plan document. Amendments are sometimes necessary to reflect new legal requirements or discretionary changes. According to the IRS, failing to adopt an amendment timely is one of the most common 401(k) mistakes made by employers today. This oversight can lead to significant consequences, including IRS penalties and missed opportunities for plan enhancement.

A basic understanding of the 401(k) amendment rules can help employers avoid this trouble with help from their 401(k) provider. This guide will cover some of the basics.

401(k) Plan Amendment Deadlines

A 401(k) plan amendment can be either “interim” or “discretionary.” Interim amendments are required to update a plan for law changes, while discretionary amendments are voluntary. Below are the general adoption deadlines for these amendments:

- Interim amendments – must be adopted (signed and dated) no later than the end of the second calendar year following the calendar year in which the change was effective.
- Discretionary amendments - must be adopted by the last day of the plan year that includes the amendment’s effective date. For plan years beginning after December 31, 2023, an amendment that increases participants’ benefits (other than increasing the amount of matching contributions) can be adopted retroactively up to the due date of the employer’s tax return.

Special Rules for Safe Harbor 401(k) Plans

To make mid-year changes to a safe harbor 401(k) plan, special amendment rules apply.

A mid-year change must meet the requirements of Notice 2016-16 to not cause the plan to lose its safe harbor status for the entire year. These requirements include:

- The change cannot be one of the prohibited changes listed in Notice 2016-16.
- If the change affects the information covered by the plan’s safe harbor notice, participants must receive an updated notice.
- If the change increases safe harbor matching contributions, the amendment must be adopted at least three months before the end of the year.

Reducing or suspending a safe harbor nonelective or matching contribution (as applicable) mid-year will cause a plan to lose its safe harbor status for the entire year. The following requirements must be met to reduce or suspend a safe harbor contribution properly:

- One of the following conditions must be true:
  - The employer is operating at an economic loss; or
  - The safe harbor notice distributed prior to the start of the year includes a statement that safe harbor contributions may be reduced or suspended mid-year.
- A supplemental notice must be distributed to employees detailing the effective date of the reduction or suspension and procedures for changing their elective deferrals.
- The reduction or suspension amendment must be effective no earlier than 30 days after the supplemental notice is distributed to employees.
- The ADP/ACP nondiscrimination test must be satisfied for the entire year in which the reduction or suspension occurs.
- If the plan is top heavy for the year in which the reduction or suspension occurs, a top heavy minimum contribution must be allocated to non-key employees.

Amendments Cannot Reduce Protected Benefits

401(k) plans are subject to “anti-cutback” rules that prohibit employers from reducing or eliminating “protected benefits” that participants have already accrued (earned) by plan amendment. Examples of protected benefits that cannot be reduced or eliminated by plan amendment are in-service distribution options (excluding hardships) and vested contributions.

The right to a year-end contribution can also be a protected benefit. Once a 401(k) participant satisfies a plan’s allocation conditions for year-end contribution (e.g., 1,000 hours of service), their “allocable share” of that contribution can’t be reduced by plan amendment.

Non-protected benefits that can be reduced or eliminated by plan amendment at any time include plan eligibility, the right to make salary deferrals, and participant loans.

How to Correct a Late Amendment

Not adopting a plan amendment timely is a big deal. Not correcting a late amendment at all can lead to significant IRS penalties, including plan disqualification. To correct a late amendment properly, employers must follow the terms of the applicable Employee Plans Compliance Resolution System (EPCRS) program:

- Self-Correction Program (SCP) - permits employers to self-correct certain plan failures without contacting the IRS or paying any fee.
- Voluntary Correction Program (VCP) - permits employers to, any time before an audit, pay a fee and receive IRS approval for correction of plan failures.
- Audit Closing Agreement Program (Audit CAP) - permits employers to pay a sanction and correct plan failures found during an audit.

Late interim amendments can usually be self-corrected under SCP by adopting the amendment within the three-year correction period specified in specified in Rev. Proc. 2021-30, section 9.

Amendment Deadline for SECURE Act Changes

The SECURE Act of 2019 (SECURE 1.0) and SECURE 2.0 Act of 2022 (SECURE 2.0) made sweeping changes to 401(k) plans. A plan can adopt these changes in operation as soon as the relevant SECURE provisions become effective. However, the amendment deadline for these changes is still more than a year away.

- SECURE 1.0 provisions - Notice 2022-33 extended the amendment deadline from the last day of the first plan year beginning on or after January 1, 2022 to December 31, 2025 (regardless of the plan’s year-end).
- SECURE 2.0 provisions – amendment deadline is the last day of the first plan year beginning on or after January 1, 2025 (December 31, 2025 for a calendar-based plan).