5 Mid-Year 401(k) Plan Design Tips for Plan Sponsors

May 26, 2026

When it comes to mid-year 401(k) plan adjustments, employers have far more flexibility than they used to. That’s largely due to IRS Notice 2016-16, which, for the past decade, has allowed plan sponsors to make certain amendments after the start of the plan year.

As expected, that flexibility still comes with guardrails. Certain structural changes are still prohibited during the plan year, and the rules around mid-year changes can be especially complex for Safe Harbor 401(k) plans. Even so, plan sponsors may still have opportunities to enhance their plan before year-end.

It’s important for plans of all types to conduct mid-year reviews. They provide sponsors with an opportunity to assess enrollment and participant outcomes, evaluate which changes may be permissible by law, and identify potential needs for the following year well in advance.

The purpose of a mid-year check-in is not always to implement changes, though in some cases it may be appropriate. More often, it’s an opportunity to stay informed about your options and maintain a clear understanding of your responsibilities and priorities as a plan sponsor.

1. SIMPLE IRA to Safe Harbor 401(k) conversions

For employers currently offering a SIMPLE IRA, a mid-year transition to a Safe Harbor 401(k) plan may be an option worth exploring. Historically, these types of transitions were generally limited to year-end implementation. However, the SECURE Act 2.0 — passed by Congress in 2022 — allows mid-year conversions, provided certain requirements are met.

Before diving into those legal requirements, it’s crucial to understand why a Safe Harbor 401(k) plan might be beneficial to your employees. In general, SIMPLE IRAs are designed to be easy to administer, which naturally means they come with limitations and a high degree of uniformity. Safe Harbor 401(k)s, on the other hand, can offer higher contribution limits and more customization. Safe Harbor 401(k) plans are also exempt from many non-discrimination tests.

Why consider making the switch mid-year? For growing organizations, it can be a way to proactively offer more competitive retirement benefits. Safe Harbor 401(k) plans are often structured to allow business owners and highly compensated employees to increase their deferral opportunities without waiting until the next calendar year.

Before pursuing the change, however, plan sponsors must meet a list of legal requirements, which includes:

Required notice: Employees must receive notice of the transition at least 30 days prior to the SIMPLE IRA’s termination. Employers must also provide details, such as adjustments to contribution limits.
Contribution limit changes: Annual deferral limits are split based on the portion of the year each plan is in effect. For example, SIMPLE IRA and 401(k) limits are reduced proportionally, then combined to yield a total annual limit.
Short plan year takes effect: The new Safe Harbor 401(k) will operate on a short plan year (e.g., July 1–December 31 if converting mid-year). Other plan limits, such as compensation caps, will be prorated to reflect the short plan year.
No overlap between plans: The SIMPLE IRA and Safe Harbor 401(k) cannot operate simultaneously, but both can exist in the same year if properly sequenced.

When considering a mid-year conversation, sponsors need to be hyper-aware of these details regarding timing and compliance.

2. Automatic enrollment and escalation

The SECURE Act 2.0 mandated that automatic enrollment must be a part of every newly created retirement plan, effective January 2025. Many preexisting plans have adopted automatic features as well, such as automatic enrollment and automatic escalation. Some firms are even implementing these features mid-year.

From a plan sponsor’s perspective, they can be powerful tools. Automatic enrollment enrolls employees in the plan by default unless they actively opt out. Automatic escalation takes it one step further by gradually increasing participants’ contribution rates over time, by default, unless they opt out. Both are proven methods for boosting participation and savings rates across the workforce.

If you run a Safe Harbor 401(k) plan, the IRS now permits you to adopt automatic enrollment and escalation policies throughout the year. So, mid-year is a good time to evaluate whether your current plan design is effectively driving participant engagement.

3. Beware of “anti-cutback” rules

The IRS permits additional mid-year changes, beyond the aforementioned rules around automatic features. For example, Safe Harbor 401(k) plans are, at times, allowed — midway through the year — to update the plan’s designated default investment alternative, revise provisions governing how plan-related disputes are resolved (including arbitration), and modify employee entry timing so that eligible participants enter the plan quarterly instead of monthly.

However, to be adopted, a company must ensure that each of those changes complies with the government’s anti-cutback rules. Put simply, employers are prohibited from reducing or eliminating certain “protected” benefits that plan participants have already earned, which generally include features such as vested account balances and optional distribution rights (other than hardship withdrawals).

Anti-cutback rules are designed to promote mid-year adjustments that lead to more generous benefits for participants, not the other way around. During a mid-year review, sponsors can use these rules as a guiding framework for evaluating potential changes.

4. Boost non-elective contributions

One of the trademark features of a Safe Harbor 401(k) plan is the non-elective contribution. This is when, in lieu of a matching contribution, an employer offers a flat contribution to a worker’s retirement plan — equivalent to either 3% or 4% of their annual compensation. By taking this route, employers are exempt from most non-discrimination testing that compares the contribution rates of high-net-worth employees and non-high-net-worth employees.

Although non-elective contributions can’t be reduced in the middle of the calendar year, employers can elect to increase them from 3% to 4% mid-year. More specifically, this feature can be amended in most Safe Harbor 401(k) plans as late as December 1. Once adopted, the contribution is applied retroactively to the beginning of the plan year.

5. Get a head start in 2027

Whether you sponsor a SIMPLE IRA or Safe Harbor 401(k) plan, mid-year reviews are beneficial for another reason: They prepare you for what’s around the corner.

Mid-year isn’t just about what you can change today — it’s also one of the best opportunities to start planning for next year’s plan design. With half a year of data already in hand, plan sponsors can evaluate what’s working and what may need adjustment for the following year, even if a mid-year change isn’t possible or appropriate.

A proactive mid-year review can help identify gaps early, refine plan operations, and highlight opportunities to improve participant outcomes — well before decisions need to be finalized. As you perform a plan review, here are some questions to consider:

Could your plan have better alignment with company goals? Business priorities can shift throughout the year. A mid-year check-in helps ensure your retirement plan evolves alongside those changes, whether that means enhancing benefits or benchmarking fees and costs.
Are you achieving desired participant outcomes? Reviewing contribution trends mid-year allows sponsors to anticipate whether employees are on track and to consider changes (such as auto features or enhanced contributions) that could improve retirement readiness.
Was last year smooth at year-end? Probably not. Many plan design changes must be adopted by specific deadlines. Starting early helps avoid last-minute compliance challenges and ensures required notices and updates are handled correctly.

In short, a mid-year review isn’t just a checkpoint — it’s a planning tool. By using this time strategically, plan sponsors can make decisions with clarity and confidence for the year ahead.

Conclusion

A mid-year review is ultimately about staying proactive. While not every plan will require immediate changes, understanding your options — and the rules that govern them — puts you in a stronger position to make thoughtful, timely decisions. A well-timed check-in can help ensure your plan continues to meet both your organization’s goals and your participants’ needs.

IMA Retirement helps sponsors design a plan that works for everyone and make the right changes (mid-year or not) at the optimal times. It’s time to start reviewing your plan with intent throughout the year.

We’re here to help. Schedule a time to discuss your plan management needs with us.

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For assistance with your retirement needs, contact an IMA Retirement advisor at retirement@imacorp.com or call 877.305.1864.