IRS Guidance/Relief for Suspensions of Safe Harbor Contributions for 2020

The IRS published Notice 2020-52 on June 29, 2020. It provides guidance and some relief for 401(k) and 403(b) plans that are considered safe harbor plans due to the COVID-19 pandemic.


Notice 2020-52 provides temporary relief by allowing employers to suspend safe harbor contributions through August 31, 2020 if they cannot meet the current requirements to suspend these contributions during the 2020 plan year.  In the Notice, the IRS also provides clarification that if an employer suspends the safe harbor contributions for only highly compensated employees, the plan retains its safe harbor status.

First, let’s start with the basics about safe harbor plans. Safe harbor plans allow employers to avoid the annual nondiscrimination testing and enable highly compensated employees to defer higher amounts into the retirement plan. Generally, if employers fund a minimum level of safe harbor contribution and accelerate the vesting of these contributions (immediate 100% vesting or 100% vesting after 2 years of service), the employer is not required to perform nondiscrimination testing, discussed below.

There are two types of safe harbor contributions:

  1. A safe harbor matching contribution, matching a certain percentage of deferrals made by the participants
  2. A safe harbor nonelective (SHNE) contribution equal to a percentage of pay (usually 3% of pay) for every eligible participant, regardless of whether they defer into the plan

The nondiscrimination testing that is avoided in a safe harbor plan is the actual deferral percentage (ADP) test and the Actual Contribution (matching) Percentage (ACP) test.  These tests compare the deferral and matching contributions averages between two groups, the highly compensated employees (HCE) and the nonhighly compensated employees (NHCE).  Typically, an HCE is any employee who owns greater than 5 percent of the plan sponsor or earned greater than $125,000 (indexed with cost of living) in the prior year. Generally, highly compensated employees’ average deferrals or matching contributions cannot exceed 2% above the average deferrals or matching contributions of the nonhighly compensated employees, or the tests fail. Failing tests usually require the highly compensated employees to receive refunds of the excess deferrals, and sometimes forfeit excess matching contributions.  A 403(b) safe harbor plan is only subject to the ACP test, not the ADP test.

With COVID-19’s negative impact on many businesses, some employers are needing to eliminate the safe harbor contribution liability immediately.  How does a plan sponsor suspend the safe harbor contributions during a plan year and what happens with the nondiscrimination testing?

Suspending Safe Harbor Contributions

There are strict rules allowing an employer to suspend safe harbor contributions during the middle of a plan year.  To suspend the contributions, the employer:

  • must have notified employees in the safe harbor notice provided before the beginning of the plan year, that the employer could eliminate the safe harbor during the plan year after a 30-day notice to affected participants; or
  • must be operating at an economic loss.

If the employer is able to suspend the safe harbor contribution because they meet one of these two requirements, the effective date of the suspension cannot be sooner than 30 days after the affected participants are notified of the suspension, or if later, the date the amendment is adopted by the employer.  Importantly, safe harbor contributions that the employer committed to before the beginning of the plan year must be provided to eligible participants through the suspension date.

IRS Notice 2020-52 provides relief to employers who do not meet one of the two suspension requirements mentioned above.  These employers may now suspend safe harbor contributions during the 2020 plan year if the plan is amended between March 13, 2020 through August 31, 2020.  The timing of the contribution suspension is different based on the type of safe harbor contribution provided under the plan. Timing for suspensions and notifications under this relief are as follows:

  • Safe Harbor Nonelective Contribution (SHNE) plans – any plans amended to suspend a SHNE contribution between March 13, 2020 and August 31, 2020 may provide a suspension notice to employees on or before August 31, 2020, disregarding the 30-day notification requirement to affected participants. This enables employers providing the SHNE contributions to suspend contributions sooner by amending the plan immediately and providing the notice no later than August 31, 2020.
  • Safe Harbor Matching Contribution plans – because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions, the suspension of contributions must be effective no later than 30 days after the affected participants are notified, or if later, the date the suspension amendment is adopted. In other words, Notice 2020-52 does not provide relief for the timing of the notice that must be given to affected employees.

Impact of Safe Harbor Contribution Suspensions on Nondiscrimination Testing

If the employer suspends safe harbor contributions, the ADP/ACP nondiscrimination testing must be performed for the entire plan year.  However, in Notice 2020-52, the IRS confirmed that if the employer only suspends the safe harbor contributions for highly compensated employees, the plan will still maintain its safe harbor status and ADP/ACP testing is not required. The IRS stated in the Notice that contributions made on behalf of HCEs are not included in the definition of safe harbor contributions. If plan sponsors suspend only the contributions for highly compensated employees, the suspension notice needs to be provided only to the HCEs and be based on the notice timing mentioned above. This clarification about HCEs is a permanent change, so employers may suspend safe harbor contributions to only HCEs after August 31, 2020 and still retain safe harbor status in their plans. 

Life after August 31, 2020

After August 31, 2020, suspending SH contributions will be business as usual.  Most safe harbor notices should have the necessary language to allow plan sponsors to suspend contributions during the middle of the plan year.  After August 31, 2020, one of the two criteria noted above under Suspending Safe Harbor Contributions must be met and the 30-day notice will need to be provided before the contributions can be suspended for all safe harbor contribution types, including the SHNE plans. As mentioned above, if employers suspend only HCE safe harbor contributions after August 31, 2020, the plan will retain its safe harbor status.

Starting Safe Harbor Contributions Again

Once an employer suspends safe harbor contributions, they cannot reinstate the contributions in 2020.  The SECURE Act, passed in December 2019, affords flexibility for some plan sponsors who provide the safe harbor nonelective contribution, but the IRS has not provided guidance yet on these rules.  The soonest an employer may start the safe harbor matching contribution will be in the 2021 plan year.  Plan sponsors may consider making other types of contributions to the plan as well such as discretionary matching contributions or profit sharing contributions.

See our prior article about the SECURE Act. Once the IRS publishes SECURE Act guidance, we will provide additional information.


Although this relief is welcome, it is not extremely helpful to employers as they struggle during the pandemic. The biggest challenge for plan sponsors is if they suspend the safe harbor contributions for all eligible employees, the ADP/ACP nondiscrimination testing must be performed, so highly compensated employees may be negatively impacted. Plan sponsors should discuss these options with their service providers and review projected 2020 ADP/ACP testing to determine the best course of action for their circumstances.

Please also refer to our prior article about the suspension of contributions.

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