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Reg-108639-99
[4830-01-p] Published July 17, 2003
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
REG-108639-99
RINs 1545-AX26, 1545-AX43
Retirement plans; Cash or deferred
arrangements under section 401(k) and
matching
contributions or employee contributions
under section 401(m) Regulations
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains proposed
regulations that would provide guidance
for certain retirement plans containing
cash or deferred arrangements under
section
401(k) and providing for matching
contributions or employee contributions
under section
401(m). These regulations affect
sponsors of plans that contain cash or
deferred
arrangements or provide for employee or
matching contributions, and participants
in these
plans. This document also contains a
notice of public hearing on these
proposed
regulations.
DATES: Written and electronic comments
and requests to speak (with outlines of
oral
comments) at a public hearing scheduled
for November 12, 2003, must be received
by
October 22, 2003.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-108639-99), room 5207,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Monday
through Friday between the hours of 8
a.m.
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Paperwork Reduction Act
The collections of information contained
in this notice of proposed rulemaking
have
been submitted to the Office of
Management and Budget for review in
accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collections of
information should be sent to the Office
of Management and Budget, Attn: Desk
Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington,
DC 20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance
Officer, W:CAR:MP:T:T:SP Washington, DC
20224. Comments on the collections of
information should be received by
Septermber 15, 2003. Comments are
specifically
requested concerning:
-3Whether
the proposed collections of information
are necessary for the proper
performance of the functions of the IRS,
including whether the information will
have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
proposed collection of information may
be
minimized, including through the
application of automated collection
techniques or other
forms of information technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide
information.
The collections of information in these
proposed regulations are contained in
§§1.401(k)-1(d)(3)(iii)(C),
1.401(k)-2(b)(3), 1.401(k)-3(d),
1.401(k)-3(f), 1.401(k)-3(g),
1.401(k)-4(d)(3), 1.401(m)-3(e),
1.401(m)-3(g) and 1.401(m)-3(h). The
information
required by §§1.401(k)-3(d),
1.401(k)-3(f), 1.401(k)-3(g),
1.401(m)-3(e), 1.401(m)-3(g)
and 1.401(m)-3(h) is required by the IRS
to comply with the requirements of
sections
401(k)(12)(D) and 401(m)(11)(A)(ii)
regarding notices that must be provided
to eligible
participants to apprize them of their
rights and obligations under certain
plans. This
information will be used by participants
to determine whether to participate in
the plan, and
by the IRS to confirm that the plan
complies with applicable qualification
requirements to
avoid adverse tax consequences. The
information required by
§1.401(k)-4(d)(3) is
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Estimated total annual reporting burden:
26,500 hours.
The estimated annual burden per
respondent is 1 hour, 10 minutes.
Estimated number of respondents: 22,500.
The estimated annual frequency of
responses: On occasion.
An agency may not conduct or sponsor,
and a person is not required to respond
to,
a collection of information unless it
displays a valid control number assigned
by the Office
of Management and Budget.
Books or records relating to a
collection of information must be
retained as long as
their contents may become material in
the administration of any internal
revenue law.
Generally, tax returns and tax return
information are confidential, as
required by 26 U.S.C.
6103.
Background
-5This
document contains proposed new
comprehensive regulations setting forth
the
requirements (including the
nondiscrimination requirements) for cash
or deferred
arrangements under section 401(k) and
for matching contributions and employee
contributions under section 401(m) of
the Internal Revenue Code (Code).
Comprehensive final regulations under
sections 401(k) and 401(m) of the Code
were last published in the Federal
Register in TD 8357 (published August 9,
1991) and
-5This
document contains proposed new
comprehensive regulations setting forth
the
requirements (including the
nondiscrimination requirements) for cash
or deferred
arrangements under section 401(k) and
for matching contributions and employee
contributions under section 401(m) of
the Internal Revenue Code (Code).
Comprehensive final regulations under
sections 401(k) and 401(m) of the Code
were last published in the Federal
Register in TD 8357 (published August 9,
1991) and
The most substantial changes to the
section 401(k) and section 401(m)
provisions
were made to the methodology for testing
the amount of elective contributions,
matching
contributions, and employee
contributions for nondiscrimination.
Section 401(a)(4)
prohibits discrimination in contribution
or benefits in favor of highly
compensated
employees (within the meaning of section
414(q)) (HCEs). Section 401(k) provides
a
special nondiscrimination test for
elective contributions under a cash or
deferred
arrangement that is part of a
profit-sharing plan, stock bonus plan,
pre-ERISA money
purchase plan, or rural cooperative
plan, called the actual deferral
percentage (ADP) test.
Section 401(m) provides a parallel test
for matching contributions and employee
contributions under a defined
contribution plan, called the actual
contribution percentage
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Sections 401(k) and 401(m) provide
alternative methods for satisfying the
applicable nondiscrimination rules: a
mathematical comparison and a number of
design-
based methods. The inherent variation in
the amount of contributions among
employees
noted above, and the fact that the
economic situation of HCEs may make them
more likely
to make elective or employee
contributions, means that the usual
nondiscrimination test
under section 401(a)(4) -- under which
for each HCE with a contribution level
there must be
a specified number of nonhighly
compensated employees (NHCEs) with equal
or greater
contributions -- is not appropriate.
Instead, average rates of contribution
are used in the
ADP and ACP tests (with a built-in
differential permitted for HCEs) and
minimum
standards for nonelective or matching
contributions are provided in the
design-based
alternatives.
Prior to the enactment of SBJPA,
sections 401(k) and 401(m) provided only
for
mathematical comparison. Specifically,
the ADP and ACP tests compare the
average of
the rates of contributions of the HCEs
to the average of the rates of
contributions of the
NHCEs. For this purpose, the rate of
contributions for an employee is the
amount of
contributions for an employee divided by
the employee’s compensation for the plan
year.
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SBJPA added design-based alternative
methods of satisfying the ADP and ACP
tests. Under these methods, if a plan
meets certain contribution and notice
requirements,
the plan is deemed to satisfy the
nondiscrimination rules without regard
to actual utilization
of the contribution opportunity offered
under the plan. These regulations
reflect this change
and the other changes that were made to
sections 401(k) and 401(m) under SBJPA,
TRA
‘97 and EGTRRA since the issuance of
final regulations under those sections.
SBJPA made the following significant
changes affecting section 401(k) and
section
401(m) plans:
•
The ADP test and ACP test were amended
to allow the use of prior year data for
NHCEs.
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•
The method of distributing to correct
failures of the ADP test or ACP test was
changed to require distribution to the
HCEs with the highest contributions.
•
Tax-exempt organizations and Indian
tribal governments are permitted to
maintain
section 401(k) plans.
•
A safe harbor alternative to the ADP
test and ACP test was introduced in
order to
provide a design-based method to satisfy
the nondiscrimination tests.
•
The SIMPLE 401(k) plan (an alternative
design-based method to satisfy the
nondiscrimination tests for small
employers that corresponds to the
provisions of
section 408(p) for SIMPLE IRA plans by
providing for smaller contributions) was
added.
•
A special testing option was provided
for plans that permit participation
before
employees meet the minimum age and
service requirements, in order to
encourage
employers to permit employees to start
participating sooner.
TRA ‘97 made the following significant
changes affecting section 401(k) and
section 401(m) plans:
•
State and local governmental plans are
treated as automatically satisfying the
ADP
and ACP tests.
•
Matching contributions for self-employed
individuals are no longer treated as
elective contributions.
EGTRRA made the following significant
changes affecting section 401(k) and
section 401(m) plans:
•
Catch-up contributions were added to
provide for additional elective
contributions
for participants age 50 or older.
•
The Secretary was directed to change the
section 401(k) regulations to shorten
the
period of time that an employee is
stopped from making elective
contributions
under the safe harbor rules for hardship
distributions.
•
Beginning in 2006, section 401(k) plans
will be permitted to allow employees to
designate their elective contributions
as “Roth contributions” that will be
subject to
taxation under the rules applicable to
Roth IRAs under section 408A.
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•
Section 401(k) plans using the
design-based safe harbor and providing
no
additional contributions in a year are
exempted from the top-heavy rules of
section
416.
•
Distributions from section 401(k) plans
are permitted upon “severance from
employment” rather than “separation from
service.”
•
The multiple use test specified in
section 401(m)(9) is repealed.
•
Faster vesting is required for matching
contributions
•
Matching contributions are taken into
account in satisfying the top-heavy
requirements of section 416.
In addition, since publication of the
final regulations, a number of items of
guidance
affecting section 401(k) and section
401(m) plans addressing these statutory
changes and
other items have been issued by the IRS,
including:
•
Notice 97-2 (1997-1 C.B. 348) provided
initial guidance on prior year ADP and
ACP testing and guidance on correction
of excess contributions and excess
aggregate contributions, including
distribution to the HCEs with the
highest
contributions.
•
Rev. Proc. 97-9 (1997-1 C.B. 624)
provided model amendments for SIMPLE
401(k) plans.
•
Notice 98-1 (1998-1 C.B. 327) provided
additional guidance on prior year
testing
issues.
•
Notice 98-52 (1998-2 C.B. 632) and
Notice 2000-3 (2000-1 C.B. 413) provided
guidance on safe harbor section 401(k)
plans.
•
Rev. Rul. 2000-8 (2000-1 C.B. 617)
addressed the use of automatic
enrollment
features in section 401(k) plans.
•
Notice 2001-56 (2001-2 C.B. 277) and
Notice 2002-4 (2002-2 I.R.B. 298)
provided
initial guidance related to the changes
made by EGTRRA.
These items of guidance are incorporated
into these proposed regulations with
some
modifications and the proposed
regulations have been reorganized as
indicated in the
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The process of reviewing and integrating
all existing administrative guidance
under
sections 401(k) and 401(m) has led
Treasury and the IRS to reconsider
certain rules and
to propose certain changes in those
rules. To the extent practicable, this
preamble
identifies the substantive changes and
explains the underlying analysis. In
many cases, the
changes will clarify or simplify
existing guidance and will reduce plan
administrative
burdens.
Treasury and the IRS appreciate the fact
that plan sponsors and third-party
administrators have developed systems
and practices in the application of
existing
administrative guidance to the design
and operation of section 401(k) and
section 401(m)
plans. In many cases, the details of
these systems and practices have been
determined
through a plan sponsor’s or
administrator’s interpretation of
specific terms in existing
guidance or, where no guidance has been
provided, through a plan sponsor’s or
administrator’s best legal and practical
judgment. As a result, these systems and
practices may differ from administrator
to administrator, from sponsor to
sponsor, or from
plan to plan.
Treasury and the IRS also recognize that
certain of the substantive changes in
these
proposed regulations will require
changes in plan design or plan
operation. However, the
proposed regulations are not otherwise
intended to require significant changes
in plan
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Explanation of Provisions
1. Rules Applicable to All Cash or
Deferred Arrangements
Section 401(k)(1) provides that a
profit-sharing, stock bonus, pre-ERISA
money
purchase or rural cooperative plan will
not fail to qualify under section 401(a)
merely
because it contains a qualified cash or
deferred arrangement. Section 1.401(k)-1
would
set forth the general definition of a
cash or deferred arrangement (CODA), the
additional
requirements that a CODA must satisfy in
order to be a qualified CODA, and the
treatment
of contributions made under a qualified
or nonqualified CODA.
As under the existing final regulations,
a CODA is defined as an arrangement
under
which employees can make a cash or
deferred election with respect to
contributions to, or
accruals or benefits under, a plan
intended to satisfy the requirements of
section 401(a). A
cash or deferred election is any direct
or indirect election by an employee (or
modification
of an earlier election) to have the
employer either: 1) provide an amount to
the employee in
the form of cash or some other taxable
benefit that is not currently available;
or 2)
contribute an amount to a trust, or
provide an accrual or other benefit,
under a plan
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The proposed regulations would continue
to provide that the definition of a CODA
excludes contributions that are treated
as after-tax employee contributions at
the time of
the contribution and contributions made
pursuant to certain one-time irrevocable
elections,
but would also specify that a CODA does
not include an arrangement under which
dividends paid to an ESOP are either
distributed to a participant or
reinvested in employer
securities in the ESOP pursuant to an
election by the participant or
beneficiary under
section 404(k)(2)(A)(iii) as added by
EGTRRA.
The proposed regulations would also
specify that a contribution is made
pursuant to
a cash or deferred election only if the
contribution is made after the election
is made.
Thus, a contribution made in
anticipation of an employee’s election
is not treated as an
1 The Department of Labor has advised
Treasury and the IRS that, under Title I
of
the Employee Retirement Income Security
Act of 1974 (ERISA), fiduciaries of a
plan must
ensure that the plan is administered
prudently and solely in the interest of
plan participants
and beneficiaries. While ERISA section
404(c) may serve to relieve certain
fiduciaries
from liability when participants or
beneficiaries exercise control over the
assets in their
individual accounts, the Department of
Labor has taken the position that a
participant or
beneficiary will not be considered to
have exercised control when the
participant or
beneficiary is merely apprised of
investments that will be made on his or
her behalf in the
absence of instructions to the contrary.
See 29 CFR 2550.404c-1 and 57 FR 46924.
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The deductibility of these prefunded
elective contributions (as well as
prefunded
matching contributions) for the taxable
year in which the contribution was made
was
addressed in Notice 2002-48 (2002-29
I.R.B.139). In that notice, the IRS
indicated that it
was reviewing issues other than the
deductibility of prefunded contributions
but, pending
additional guidance, would not challenge
the deductibility of the contributions
provided
actual payment is made during the
taxable year for which the deduction is
claimed and the
amount deducted does not exceed the
applicable limit under section
404(a)(3)(A)(i). After
considering this issue, the IRS and
Treasury have concluded that the
prefunding of elective
contributions and matching contributions
is inconsistent with sections 401(k) and
401(m).
Thus, under these proposed regulations,
an employer would not be able to prefund
elective
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2. Qualified CODAs
A. General rules relating to qualified
CODAs
Elective contributions under a qualified
CODA are treated as employer
contributions and generally are not
included in the employee’s gross income
at the time the
cash would have been received (but for
the cash or deferred election), or at
the time
contributed to the plan. Elective
contributions under a qualified CODA are
included in the
employee’s gross income however, if the
contributions are in excess of the
section 402(g)
limit for a year, are designated Roth
contributions (under section 402A,
effective for tax
years beginning after December 31, 2005)
or are recharacterized as after-tax
contributions as part of a correction of
an ADP test failure.
A CODA is not qualified unless it is
part of a profit sharing plan, stock
bonus plan,
pre-ERISA money purchase plan, or rural
cooperative plan and provides for an
election
between contributions to the plan or
payments directly in cash. In addition,
a CODA is not
qualified unless it meets the following
requirements: 1) the elective
contributions under the
CODA satisfy either the ADP test set
forth in section 401(k)(3) or one of the
design-based
alternatives in section 401(k)(11) or
(12); 2) elective contributions under
the CODA are
nonforfeitable at all times; 3) elective
contributions are distributable only on
the occurrence
of certain events, including attainment
of age 59½, hardship, death, disability,
severance
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Subject to certain exceptions, State and
local governmental plans are not allowed
to
include a qualified CODA. Plans
sponsored by Indian tribal governments
and rural
cooperatives are allowed to include a
qualified CODA.
B. Nondiscrimination rules applicable to
CODAs
As under the existing regulations, the
proposed regulations would provide that
the
special nondiscrimination standards set
forth in section 401(k) are the
exclusive means by
which a qualified CODA can satisfy the
nondiscrimination in amount of
contribution
requirement of section 401(a)(4). These
special nondiscrimination standards now
include:
the ADP test, the ADP safe harbor and
the SIMPLE 401(k) plan. Pursuant to
section
401(k)(3)(G), a State or local
governmental plan is deemed to satisfy
the ADP test.
In addition, as under existing
regulations, the plan must satisfy the
requirements of
§1.401(a)(4)-4 with respect to the
nondiscriminatory availability of
benefits, rights and
features, including the availability of
each level of elective contributions,
matching
contributions, and after-tax employee
contributions. The provisions of the
existing
regulations related to compliance with
sections 410(b) and 401(a)(4) would be
revised to
clarify the relationship of the rules
under sections 410(b) and 401(a)(4) to
the requirements
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These proposed regulations are designed
to provide simple, practical rules that
accommodate legitimate plan changes. At
the same time, the rules are intended to
be
applied by employers in a manner that
does not make use of changes in plan
testing
procedures or other plan provisions to
inflate inappropriately the ADP for
NHCEs (which is
used as a benchmark for testing the ADP
for HCEs) or to otherwise manipulate the
nondiscrimination testing requirements
of section 401(k). Further, these
nondiscrimination
requirements are part of the overall
requirement that benefits or
contributions not
discriminate in favor of HCEs.
Therefore, a plan will not be treated as
satisfying the
requirements of section 401(k) if there
are repeated changes to plan testing
procedures or
plan provisions that have the effect of
distorting the ADP so as to increase
significantly the
permitted ADP for HCEs, or otherwise
manipulate the nondiscrimination rules
of section
401(k), if a principal purpose of the
changes was to achieve such a result.
C. Aggregation and disaggregation of
plans
The proposed regulations would
consolidate the rules in the existing
regulations
regarding identification of CODAs and
plans for purposes of demonstrating
compliance
with the requirements of section 401(k).
As under the existing regulations, all
CODAs
included in a plan are treated as a
single CODA for purposes of applying the
nondiscrimination tests. For this
purpose, a plan is generally defined by
reference to
§1.410(b)-7(a) and (b) after application
of the mandatory disaggregation rules of
§1.410(b)-7(c) (other than the mandatory
disaggregation of section 401(k) and
section
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The proposed regulations would change
the treatment of a CODA under a plan
which includes an ESOP. Section
1.410(b)-7(c)(2) provides that the
portion of a plan that
is an ESOP and the portion that is not
an ESOP are treated as separate plans
for
purposes of section 410(b) (except as
provided in §54.4975-11(e)).
Accordingly, under
the existing regulations, such a plan
must apply two separate
nondiscrimination tests: one
for elective contributions going into
the ESOP portion (and invested in
employer stock) and
one for elective contributions going in
the non-ESOP portion of the plan. The
additional
testing results in increased expense and
administrative difficulty for the plan
and creates
the possibility that the ESOP portion or
the non-ESOP portion may fail the ADP
test or
ACP test because HCEs may be more or
less likely to invest in employer
securities than
NHCEs.
Since the issuance of the existing
regulations, the use of an ESOP as the
employer
stock fund in a section 401(k) plan has
become much more widespread. In light of
this
development, the proposed regulations
would eliminate disaggregation of the
ESOP and
non-ESOP portions of a single section
414(l) plan for purposes of ADP testing.
The same
-18rule
would apply for ACP testing under
section 401(m). In addition, the
proposed
regulations would provide that, for
purposes of applying the ADP test or the
ACP test, an
employer could permissively aggregate
two section 414(l) plans, one that is an
ESOP and
one that is not.
However, the exception to mandatory
disaggregation of ESOPs from non-ESOPs
set forth in these proposed regulations
would not apply for purposes of
satisfying section
410(b). Accordingly, the group of
eligible employees under the ESOP and
non-ESOP
portions of the plan must still
separately satisfy the requirements of
sections 401(a)(4) and
410(b).
The proposed regulations would also
provide that a single testing method
must
apply to all CODAs under a plan. This
has the effect of restricting an
employer’s ability to
aggregate section 414(l) plans for
purposes of section 410(b), if those
plans apply
inconsistent testing methods. For
example, a plan that applies the ADP
test of section
401(k)(3) may not be aggregated with a
plan that uses the ADP safe harbor of
section
401(k)(12) for purposes of section
410(b).
-18rule
would apply for ACP testing under
section 401(m). In addition, the
proposed
regulations would provide that, for
purposes of applying the ADP test or the
ACP test, an
employer could permissively aggregate
two section 414(l) plans, one that is an
ESOP and
one that is not.
However, the exception to mandatory
disaggregation of ESOPs from non-ESOPs
set forth in these proposed regulations
would not apply for purposes of
satisfying section
410(b). Accordingly, the group of
eligible employees under the ESOP and
non-ESOP
portions of the plan must still
separately satisfy the requirements of
sections 401(a)(4) and
410(b).
The proposed regulations would also
provide that a single testing method
must
apply to all CODAs under a plan. This
has the effect of restricting an
employer’s ability to
aggregate section 414(l) plans for
purposes of section 410(b), if those
plans apply
inconsistent testing methods. For
example, a plan that applies the ADP
test of section
401(k)(3) may not be aggregated with a
plan that uses the ADP safe harbor of
section
401(k)(12) for purposes of section
410(b).
Restrictions on withdrawals
As discussed above, a qualified CODA
must provide that elective contributions
may only be distributed after certain
events, including hardship and severance
from
employment. EGTRRA amended section
401(k)(2)(B)(i)(I) by replacing
“separation from
service” with “severance from
employment.” This change eliminated the
“same desk rule”
as a standard for distributions under
section 401(k) plans.
In addition, EGTRRA amended Code section
401(k)(10) by deleting disposition by
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401(k)(2)(B)(i)(IV) to provide that the
period during which an employee is
prohibited from
making elective and employee
contributions following a hardship
distribution is 6 months
(instead of 12 months as required under
§1.401(k)-1(d)(2)(iv)(B)(4) of the
existing
regulations).2
Notice 2001-56 and Notice 2002-4
provided guidance on these EGTRRA
changes
to the distribution rules for elective
contributions. That guidance is
incorporated in these
proposed regulations. In connection with
the change to severance from employment,
comments are requested on whether a
change in status from employee to leased
employee described in section 414(n)
should be treated as a severance from
employment
that would permit a distribution to be
made. In addition, the proposed
regulations do not
include reference to “retirement”
(included in the existing regulation) as
an event allowing
distribution because retirement is not
listed in the statute, and is subsumed
by severance
from employment.
In addition to the statutory changes,
the rules relating to hardship
distributions have
2 Under section 402(c), as amended by
the IRS Restructuring and Reform Act of
1998, Public Law 105-206 (112 Stat.
685), and EGTRRA, a hardship
distribution is not an
eligible rollover distribution. While
the change affects distributions from a
section 401(k)
plan, there is no specific reference to
the change in these proposed regulations
because
these regulations are under sections
401(k) and 401(m).
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The proposed regulations would also
modify the existing regulations to add
other
types of defined contribution plans to
the list of plans that an employer may
maintain after
the termination of the plan that
contains the qualified CODA while still
providing for
distribution of elective contributions
upon plan termination. The list of such
plans has been
expanded to include not only an ESOP and
a SEP, but also a SIMPLE IRA plan, a
plan or
contract that satisfies section 403(b)
and a section 457 plan.
Finally, under the existing regulations,
a plan that receives a plan-to-plan
transfer
that includes elective contributions,
QNECs, or QMACs, must provide that the
restrictions
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E. Other rules for qualified CODAs
The proposed regulations would generally
retain the additional requirements set
forth in the existing regulations that a
CODA must satisfy in order to be
qualified, with
some modifications. First, in order to
be a qualified CODA the arrangement must
provide
an employee with an effective
opportunity to elect to receive the
amount in cash no less
than once during the plan year. Under
the proposed regulations, whether an
employee has
an effective opportunity is determined
based on all the relevant facts and
circumstances,
including notice of the availability of
the election, the period of time before
the cash is
currently available during which an
election may be made, and any other
conditions on
elections.
The proposed regulations would also
provide that a plan must provide for
satisfaction of one of the specific
nondiscrimination alternatives described
in section
401(k). As with the existing
regulations, the plan may accomplish
this by incorporating by
reference the ADP test of section
401(k)(3) and the regulations under
proposed §1.401(k)2,
if that is the nondiscrimination
alternative being used. If, with respect
to the
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-22
The proposed regulations would retain
the existing rules relating to the
section
401(k)(4)(A) prohibition on having
benefits (other than a match) contingent
on making or
not making an elective contribution.
However, the proposed regulations would
specify that,
in the case of a benefit that requires
an amount to be withheld from an
employee’s pay, an
employer is not violating the section
401(k)(4)(A) contingent benefit rule
merely because
the CODA restricts elective
contributions to amounts available after
such withholding from
the employee’s pay (after deduction of
all applicable income and employment
taxes). In
addition, these proposed regulations
also reflect the amendment to section
416(c)(2)(A)
under which matching contributions can
be taken into account for purposes of
satisfying
-23
-23
To reflect the amendment of section
401(k)(4)(B) by SBJPA to allow tax
exempt
organizations to maintain section 401(k)
plans, the proposed regulations would
also
eliminate the provision prohibiting a
tax-exempt employer from adopting a
section 401(k)
plan.
As under the existing final regulations,
these proposed regulations would provide
that a partnership is permitted to
maintain a CODA, and individual partners
are permitted
to make cash or deferred elections with
respect to compensation attributable to
services
rendered to the entity, under the same
rules that apply to common-law
employees. This
rule has been extended to sole
proprietors. The provisions of these
regulations also reflect
the enactment of section 402(g)(8)
(initially section 402(g)(9) as enacted
by TRA ‘97)
providing that matching contributions
with respect to partners and sole
proprietors are no
longer treated as elective
contributions.
3. Nonqualified CODAs
The proposed regulations would generally
retain the rules in the existing
regulations
applicable to a nonqualified CODA (i.e.,
a CODA that fails one or more of the
applicable
requirements to be a qualified CODA).
Because elective contributions under
such an
arrangement are not entitled to the
constructive receipt relief set forth in
section 402(e)(3),
the contributions are currently taxable
to the employee. In addition, the plan
to which such
contributions are made must satisfy any
nondiscrimination requirements that
would
otherwise apply under section 401(a)(4).
-24
-24The
Actual Deferral Percentage (ADP) Test
A. General rules relating to the ADP
test
Section 1.401(k)-2 sets forth the rules
for a CODA that is applying the ADP test
contained in section 401(k)(3). Under
the ADP test, the percentage of
compensation
deferred for the eligible HCEs is
compared annually to the percentage of
compensation
deferred for eligible NHCEs, and if
certain limits are exceeded by the HCEs,
corrective
action must be taken by the plan.
Correction can be made through the
distribution of
excess contributions, the
recharacterization of excess
contributions, or the contribution of
additional employer contributions.
Section 401(k)(3)(A), as amended by
SBJPA, generally provides for the use of
prior year data in determining the ADP
of NHCEs, while current year data is
used for
HCEs. This testing option is referred to
as the prior year testing method.
Alternatively, a
plan may provide for the use of current
year data for determining the ADPs for
both
NHCEs and HCEs, which is known as the
current year testing method. The
proposed
regulations would use the term
applicable year to describe the year for
which the ADP is
determined for the NHCEs.
Section 401(k)(3)(F), as added by SBJPA,
provides that a plan benefitting
otherwise excludable employees and that,
pursuant to section 410(b)(4)(B), is
being
treated as two separate plans for
purposes of section 410(b), is permitted
to disregard
NHCEs who have not met the minimum age
and service requirements of section
410(a)(1)(A). Thus, the proposed
regulations would permit such a plan to
perform the
ADP test by comparing the ADP for all
eligible HCEs for the plan year and the
ADP of
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B. Elective contributions used in the
ADP test
The proposed regulations would generally
follow the existing regulations in
defining
which elective contributions are
reflected in the ADP test and which ones
are not. The
proposed regulations would reflect the
rule contained in the regulations under
section
414(v), under which catch-up
contributions that are in excess of a
statutory limit or an
employer-provided limit are not taken
into account under the ADP test. See
§1.414(v). In
addition, the proposed regulations would
incorporate the rule in §1.402(g)-1 that
provides
excess deferrals that are distributed
are still taken into account under the
ADP test (with
the exception of deferrals made by NHCEs
that were in violation of section
401(a)(30)).
The proposed regulations retain the rule
that elective contributions must be paid
to the trust
within 12 months after the end of the
plan year. However, for plans subject to
Title I of
ERISA, contributions must be paid to the
trust much sooner in order to satisfy
the
Department of Labor’s regulations
relating to when elective contributions
become plan
assets.
-26Section
401(k)(3) provides that the actual
deferral ratio (ADR) of an HCE who is
eligible to participate in 2 or more
CODAs of the same employer is calculated
by treating
all CODAs in which the employee is
eligible to participate as one CODA. The
existing
regulations implement this rule by
aggregating the elective contributions
of such an HCE
for all plan years that end with or
within a single calendar year. This can
yield an
inappropriate result if the plan years
are different, because more than 12
months of
elective contributions could be included
in an employee’s ADR. These proposed
regulations would modify this rule to
provide that the ADR for each HCE
participating in
more than one CODA is determined by
aggregating the HCE’s elective
contributions that
are within the plan year of the CODA
being tested. In addition, the
definition of period of
participation for purposes of
determining compensation would be
modified to take into
account periods of participation under
another plan where the elective
contributions must
be aggregated for an HCE. As a result,
even in the case of plans with different
plan years,
each of the employer’s CODAs will use 12
months of elective contributions and 12
months
of compensation in determining the ADR
for an HCE who participates in multiple
arrangements.
The proposed regulations would retain
the rule in the existing regulations
that
provides that the HCE aggregation of
elective contributions under CODAs does
not apply
where the CODAs are within plans that
cannot be aggregated under
§1.410(b)-7(d), but
only after applying the modifications to
the section 410(b) aggregation and
disaggregation
rules for section 401(k) plans provided
in the proposed regulations. The
non-application of
the HCE aggregation rule would have less
significance in light of the change
described
-27
-27
C. Additional employer contributions
used in the ADP test
The proposed regulations would generally
retain the rules in the existing
regulations
permitting a plan to take qualified
nonelective contributions or qualified
matching
contributions (i.e., nonelective or
matching contributions that satisfy the
vesting and
distribution limitations of section
401(k)(2)(B) and (C)) into account under
the ADP test,
except as described below. Thus, an
employer whose CODA has failed the ADP
test can
correct this failure by making
additional qualified nonelective
contributions (QNECs) or
qualified matching contributions (QMACs)
for its NHCEs. The proposed regulations
would
no longer describe such contributions as
being treated as elective contributions
under the
arrangement, but would nonetheless
permit such contributions to be taken
into account
under the ADP test.
As under the existing regulations, these
proposed regulations would provide that
QNECs must satisfy four requirements in
addition to the vesting and distribution
rules
described above before they can be taken
into account under the ADP test: 1) The
amount
of nonelective contributions, including
the QNECs that are used under the ADP
test or the
ACP test, must satisfy section
401(a)(4); 2) the nonelective
contributions, excluding the
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Thus,
in the case of a plan using prior year
ADP testing, any QNECs that are to be
allocated to
the NHCEs for the prior plan year must
be contributed before the last day of
the current
plan year in order to be taken into
account.
Some plans provide a correction
mechanism for a failed ADP test that
targets
QNECs to certain NHCEs in order to
reduce the total contributions to NHCEs
under the
correction. Under the method that
minimizes the total QNECs allocated to
NHCEs under
the correction, the employer makes a
QNEC to the extent permitted by the
section 415
limits to the NHCE with the lowest
compensation during the year in order to
raise that
NHCE’s ADR. If the plan still fails to
pass the ADP test, the employer
continues expanding
the group of NHCEs who receive QNECs to
the next lowest-paid NHCE until the ADP
test
is satisfied. By using this bottom-up
leveling technique, the employer can
pass the ADP
test by contributing small amounts of
money to NHCEs who have very low
compensation
for the plan year (for example, an
employee who terminated employment in
early January
with $300 of compensation). This is
because of the fact that the ADP test is
based on an
3 With respect to this timing
requirement, it should be noted that in
order to be taken
into account for purposes of section
415(c) for a limitation year, the
contributions will need
to be made no later than 30 days after
the end of the section 404(a)(6) period
applicable
to the taxable year with or within which
the limitation year ends.
-29
-29
The IRS and Treasury have been concerned
that, by using these types of
techniques, employers may pass the ADP
test by making high percentage QNECs to
a
small number of employees with low
compensation rather than providing
contributions to a
broader group of NHCEs. In addition, the
legislative history to EGTRRA expresses
Congressional intent that the Secretary
of the Treasury will use his existing
authority to
address situations where qualified
nonelective contributions are targeted
to certain
participants with lower compensation in
order to increase the ADP of the NHCEs.
(See
EGTRRA Conference Report, H.R. Conf.
Rep. 107-84, 240).
Accordingly, the proposed regulations
would add a new requirement that a QNEC
must satisfy in order to be taken into
account under the ADP test. This
requirement,
designed to limit the use of targeted
QNECs, would generally treat a plan as
providing
impermissibly targeted QNECs if less
than half of all NHCEs are receiving
QNECs and
would also treat a QNEC as impermissibly
targeted if the contribution is more
than double
the QNECs other nonhighly compensated
employees are receiving, when expressed
as a
percentage of compensation. However,
QNECs that do not exceed 5% of
compensation
are never treated as targeted and would
always satisfy the new requirement.
This restriction on targeting QNECs
would be implemented in the proposed
regulations by providing that a QNEC
that exceeds 5% of compensation could be
taken
into account for the ADP test only to
the extent the contribution, when
expressed as a
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-30
The proposed regulations would also
implement a prohibition against double
counting of QNECs that was set forth in
Notice 98-1. Generally, QNECs used in an
ADP
or ACP test, used to satisfy the safe
harbor under section 401(k), or under a
SIMPLE
401(k) plan can not be used again to
demonstrate compliance with another test
under
section 401(k)(3) or 401(m)(2). For
example, double counting could arise
when QNECs
on behalf of NHCEs are used to determine
the ADP under current year testing in
year 1
and then, if the employer elected prior
year testing, are used again in year 2
to determine
-31
-31
D. Correction
Section 401(k)(8)(C), as amended by the
SBJPA, provides that, for purposes of
correcting a plan’s failure to meet the
nondiscrimination requirements of
section 401(k)(3),
distribution of excess contributions is
made on the basis of the amount of the
contributions
by, or on behalf of, each HCE. The
proposed regulations would implement
this correction
procedure in the same manner as set
forth in Notice 97-2. Thus, the total
amount of
excess contributions is determined using
the rules under the existing final
regulations (i.e.,
based on high percentages). Then that
total amount is apportioned among the
HCEs by
assigning the excess to be distributed
first to those HCEs who have the
greatest dollar
amount of contributions taken into
account under the ADP test (as opposed
to the highest
deferral percentage). If these amounts
are distributed or recharacterized in
accordance
with these regulations, the plan
complies with the ADP test for the plan
year with no
obligation to recalculate the ADP test.
The proposed regulations would provide a
special rule for correcting through
distribution of excess contributions in
the case of an HCE who participates in
multiple
plans with CODAs. In that case, the
proposed regulations would provide that,
for purposes
of determining which HCE will be
apportioned a share of the total excess
contributions to
be distributed from a plan, all
contributions in CODAs in which such an
HCE participates
are aggregated and the HCE with the
highest dollar amount of contributions
will
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-32
The proposed regulations would generally
follow the rules in the existing
regulations
on the determination of net income
attributable to excess contributions.
The existing
regulations provide for a reasonable
determination of net income attributable
to an excess
contribution, but do not specify which
contribution within the plan year is to
be treated as
the excess contribution to be
distributed. This provision would be
retained in the proposed
regulations along with the existing
alternative method of determining the
net income, which
approximates the result that would apply
if the excess contribution is made on
the first day
of the plan year. However, to the extent
the employee is or will be credited with
allocable
gain or loss on those excess
contributions for the period after the
end of the plan year (the
gap period), the proposed regulations
would now require that income be
determined for
that period. As under the existing
regulations, the determination of the
income for the gap
period could be based on the income
determined using the alternative method
for the
-33
-33
The proposed regulations would permit
the recharacterization of excess
contributions in a manner that generally
follows the existing regulations.
However, the year
the employee must include the
recharacterized contribution in current
income has been
changed to match the year that the
employee would have had to include the
excess
contribution in income, had it been
distributed. Thus, if the
recharacterized amount is less
than $100, it is included in gross
income in the year that it is
recharacterized, rather than
the year of the earliest elective
contributions for the employee.
The proposed regulations would retain
the rules in the existing regulations
regarding the timing and tax treatment
of distributions of excess
contributions, coordination
with the distribution of excess
deferrals and the treatment of matches
attributable to excess
contributions.
E. Special rules relating to prior year
testing
The proposed regulations would generally
follow the rules set forth in Notice
98-1
regarding prior year testing, including
the limitations on switching from
current year testing
to prior year testing. However, the
proposed regulations would provide that
a plan is
permitted to be inconsistent between the
choice of current year testing method
and prior
year testing method, as applied for ADP
purposes and ACP purposes. In such a
case,
any movement of elective contributions
or QMACs between the ADP and ACP tests
(including recharacterization) would be
prohibited.
The proposed regulations would generally
incorporate the rules set forth in
Notice
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-34
5. Safe Harbor Section 401(k) Plans
Section 401(k)(12) provides a
design-based safe harbor method under
which a
CODA is treated as satisfying the ADP
test if the arrangement meets certain
contribution
and notice requirements. Section
1.401(k)-3 of these proposed
regulations, which sets
forth the requirements for these
arrangements, generally follows the
rules set forth in Notice
98-52 and Notice 2000-3. Thus, a plan
satisfies the section 401(k) safe harbor
if it makes
specified QMACs for all eligible NHCEs.
The matching contributions can be under
a basic
matching formula that provides for QMACs
equal to 100% of the first 3% of
elective
contributions and 50% of the next 2% or
an enhanced matching formula that is at
least as
-35
-35
A plan using the safe harbor method must
also comply with certain other
requirements. Among these is the
requirement in section 401(k)(12)(B)(ii)
that provides
that the rate of matching contribution
for any elective contribution on the
part of any HCE
cannot exceed the rate of matching
contribution that would apply to any
NHCE with the
same rate of elective contribution.
Notice 98-52 advised that the general
rules on
aggregating contributions for HCEs
eligible under more than one CODA would
apply for
this purpose. The IRS and Treasury have
determined that such aggregation is not
applicable under the ADP safe harbor.
Accordingly, these proposed regulations
would not
require that elective or matching
contributions on behalf of an HCE who is
eligible to
participate in more than one plan of the
same employer be aggregated for purposes
of the
requirement of section
401(k)(12)(B)(ii). Thus, the rate of
match for purposes of
determining whether an HCE has a higher
matching rate is based only on matching
contributions with respect to elective
contributions under the safe harbor
plan. However,
for an employer that uses the safe
harbor method of satisfying the ACP
test, the rule in
Notice 98-52 is retained for applying
the ACP safe harbor, with an exception
for
nonsimultaneous participation (as
discussed in connection with the ACP
safe harbor
-36
-36
These proposed regulations do not
provide any rules relating to suspension
of
employee contributions under a plan that
provides that safe harbor matching
contributions
are made with respect to the sum of
elective contributions and employee
contributions.
Although Notice 2000-3 specifically
permitted suspension of employee
contributions in
certain circumstances, the IRS and
Treasury have determined that there are
no limits on
suspending employee contributions,
provided that safe harbor matching
contributions are
made with respect to elective
contributions. This is because the
restrictions on
suspension of elective contributions are
sufficient to ensure an eligible NHCE
can get the
full matching contribution.
The proposed regulations do not include
any exception to the requirements for
safe
harbor matching contributions with
respect to catch-up contributions.
Treasury and the IRS
are aware that there are questions
concerning the extent to which catch up
contributions
are required to be matched under a plan
that provides for safe harbor matching
contributions. Treasury and the IRS are
interested in comments on the specific
circumstances under which elective
contributions by a NHCE to a safe harbor
plan would
be less than the amount required to be
matched, e.g., less than 5% of safe
harbor
compensation, but would be treated by
the plan as catch-up contributions, and
on the
extent to which a safe harbor plan
should be required to match catch-up
contributions
under such circumstances.
Section 401(k)(12)(D) contains a
requirement that each eligible employee
be
provided with a notice of the employee’s
rights and obligations under the plan.
These
-37
-37
These proposed regulations would clarify
that a section 401(k) safe harbor plan
must generally be adopted before the
beginning of the plan year and be
maintained
throughout a full 12-month plan year.
This requirement is consistent with the
notion that the
statute specifies a certain contribution
level for nonhighly compensated
employees in order
to be deemed to pass the
nondiscrimination requirements. If the
contribution level is not
maintained for a full 12-month year, the
employer contributions made on behalf of
nonhighly
compensated employees should not support
what could be a full year’s contribution
by the
highly compensated employees.
The proposed regulations would adopt the
exception to the requirement that a
section 401(k) safe harbor plan be in
place before the beginning of the plan
year that was
-38
-38
The proposed regulations would recognize
the practical difficulty in a 12-month
requirement by following the rule in
Notice 98-52 that allowed a short plan
year in the first
plan year and would allow a short plan
year in certain other circumstances.
Specifically, a
section 401(k) safe harbor plan could
have a short plan year in the year the
plan
terminates, if the plan termination is
in connection with a merger or
acquisition involving the
employer, or the employer incurs a
substantial business hardship comparable
to a
substantial business hardship described
in section 412(d). In addition, a
section 401(k)
safe harbor plan could have a short plan
year if the plan terminates, the
employer makes
the safe harbor contributions for the
short year, employees are provided
notice of the
change, and the plan passes the ADP
test. Finally, a safe harbor plan could
have a short
-39
-39
Under section 401(k)(12)(F), safe harbor
contributions are permitted to be made
to
a plan other than the plan that contains
the CODA. These proposed regulations
reflect that
rule and provide that the plan to which
the safe harbor contributions are made
need not be
a plan that can be aggregated with the
plan that contains the cash or deferred
arrangement.
Whether a contribution is taken into
account for purposes of the safe harbor
is
determined in accordance with the rules
regarding inclusion in ADP testing under
proposed §1.401(k)-2(a). Thus, for
example, a plan that provides for safe
harbor matching
contributions in 2006 need not provide
for a matching contribution with respect
to an
elective contribution made during the
first 2½ months of 2007 and attributable
to service
during 2006, unless that elective
contribution is taken into account for
2006.
6. SIMPLE 401(k) Plans
Pursuant to section 401(k)(11), a SIMPLE
401(k) plan is treated as satisfying the
requirements of section 401(k)(3)(A)(ii)
if the contribution, vesting, notice and
exclusive
plan requirements of section 401(k)(11)
are satisfied. Section 1.401(k)-4 of
these
proposed regulations reflects the
provisions of section 401(k)(11) in a
manner that follows
the positions reflected in the model
amendments set forth in Rev. Proc. 97-9.
7. Matching Contributions and Employee
Contributions.
Section 401(m)(2) sets forth a
nondiscrimination test, the ACP test,
with respect to
matching contributions and employee
contributions that is parallel to the
nondiscrimination
-40
-40
These proposed regulations also include
provisions regarding plan aggregation
and disaggregation that are similar to
those proposed for CODAs under section
401(k).
For example, matching contributions made
under the portion of a plan that is an
ESOP and
the portion of the same plan that is not
an ESOP would not be disaggregated under
these
proposed regulations.
The definitions of matching contribution
and employee contribution under
§1.401(m)-1 of the proposed regulations
would generally follow the definitions
in the
existing regulations. Thus, whether an
employer contribution is on account of
an elective
deferral or employee contribution – and
thus is a matching contribution -- is
determined
based on all the relevant facts and
circumstances. However, the proposed
regulations
-41
-41
8. ACP Test for Matching Contributions
and Employee Contributions
Section 1.401(m)-2 of the proposed
regulations would provide rules for the
ACP
test that generally parallel the rules
applicable to the ADP test in proposed
§1.401(k)-2.
Thus, for example, the ACP test may be
run by comparing the ACP for eligible
HCEs for
the current year with the ACP for
eligible NHCEs for either the current
plan year or the prior
plan year. Similarly, the proposed
regulations reflect the special ACP
testing rule in
section 401(m)(5)(C) for a plan that
provides for early participation,
comparable to the
special ADP testing rule in section
401(k)(3)(F), as set forth in proposed
§1.401(k)2(
a)(1)(iii).
The determination of the actual
contribution ratio (ACR) for an eligible
employee,
and the contributions that are taken
into account in determining that ACR,
under these
-42
-42
The proposed regulations would retain
the rule from the existing regulations
under
which a QMAC that is taken into account
in the ADP test is excluded from the ACP
test. In
addition, the proposed regulations would
continue to allow QNECs to be taken into
account for ACP testing, but would
provide essentially the same
restrictions on targeting
QNECs to a small number of NHCEs as is
provided in proposed §1.401(k)-2. The
only
difference in the rules would be that
the contribution percentages used to
determine the
lowest contribution percentage would be
based on the sum of the QNECs and those
matching contributions taken into
account in the ACP test, rather than the
sum of the
QNECs and the QMACs taken into account
under the ADP test. Because QNECs that
do
not exceed 5% are not subject to the
limits on targeted QNECs under either
the ADP test
or the ACP test, an employer is
permitted to take into account up to 10%
in QNECs for an
eligible NHCE, 5% in ADP testing and 5%
in ACP testing, without regard to how
many
NHCEs receive QNECs.
In addition, to prevent an employer from
using targeted matching contributions to
circumvent the limitation on targeted
QNECs, the proposed regulations would
provide that
matching contributions are not taken
into account in the ACP test to the
extent the
-43
-43
The proposed regulations would set
limits on the use of elective
contributions in the
ACP test that are in addition to the
rules in the existing regulations under
which elective
contributions may be taken into account
for the ACP test only to the extent the
plan
satisfies the ADP test, determined by
including such elective contributions in
the ADP test.
Under the new rule, the proposed
regulations would provide that elective
contributions
under a plan that is not subject to the
ADP test, such as a plan that uses the
safe harbor
method of section 401(k)(12) or a
contract or arrangement subject to the
requirements of
section 403(b)(12)(A)(ii), may not be
taken into account for the ACP test. In
the absence
of this prohibition, contributions that
are not properly considered “excess”
could be taken
into account under the ACP test.
The provisions of these proposed
regulations regarding correction of
excess
aggregate contributions, including
allocation of excess aggregate
contributions and
determination of allocable income, would
generally be consistent with the
provisions of the
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-44
9. Safe Harbor Section 401(m) Plans
Section 401(m)(11) provides a
design-based safe harbor method of
satisfying the
ACP test contained in section 401(m)(2).
Under section 401(m)(11), a defined
contribution plan is treated as
satisfying the ACP test with respect to
matching
contributions if the plan satisfies the
ADP safe harbor of section 401(k)(12)
and matching
contributions are not made with respect
to employee contributions or elective
contributions
in excess of 6% of an employee’s
compensation. For a plan that satisfies
the ADP safe
harbor using a 3% nonelective
contribution, two additional
requirements that apply to a
plan that satisfies the ADP safe harbor
using matching contributions also apply:
1) the rate
of an employer’s matching contribution
does not increase as the rate of
employee
contributions or elective deferrals
increase; and 2) the matching
contribution with respect
to any HCE at any rate of employee
contribution or elective deferral is not
greater than with
respect to any NHCE. In addition, the
ratio of matching contributions on
behalf of an HCE
to that HCE’s elective deferrals and
employee contributions for a plan year
cannot be
greater than the ratio of matching
contributions to elective deferrals or
employee
-45
-45
Section 1.401(m)-3 of these proposed
regulations, which sets forth the
requirements for these plans, would
generally follow the rules set forth in
Notice 98-52 and
Notice 2000-3. These proposed
regulations would clarify that, for
purposes of determining
whether an HCE has a higher rate of
matching contributions than any NHCE,
any NHCE
who is an eligible employee under the
safe harbor CODA must be taken into
account, even
if the NHCE is not eligible for a
matching contribution. This means that a
plan with a
provision which limits matching
contributions to employees who are
employed on the last
day of the plan year will not be able to
satisfy the ACP safe harbor, since a
NHCE who is
not eligible to receive a matching
contribution on account of the last day
requirement will
nonetheless be taken into consideration
in determining whether the plan
satisfies section
401(m)(11)(B)(iii). The proposed
regulations also include the requirement
that matching
contributions made at the employer's
discretion with respect to any employee
cannot
exceed a dollar amount equal to 4% of
the employee's compensation and that a
safe
harbor plan must permit all eligible
NHCEs to make sufficient elective
contributions (or
employee contributions, if applicable)
to receive the maximum matching
contribution
provided under the plan.
The proposed regulations would provide a
special rule for satisfying section
401(m)(11)(B)(iii) in the case of an HCE
who participates in two or more plans
that provide
for matching contributions. Under this
rule, a plan will not fail to satisfy
the requirements of
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-46
The safe harbor in section 401(m)(11)
does not apply to employee
contributions.
Consequently, a plan that provides for
employee contributions and matching
contributions
must satisfy the ACP test even though
the matching contributions satisfy the
safe harbor
requirements for section 401(m)(11).
However, the proposed regulations would
also
adopt the position in Notice 98-52 that
the ACP test is permitted to be applied
by
disregarding all matching contributions
with respect to all eligible employees.
If the ADP
safe harbor using matching contributions
is satisfied but the ACP safe harbor is
not
satisfied, the proposed regulations
would adopt the position in Notice 98-52
that the ACP
test is permitted to be applied
disregarding matching contributions for
any employee that
do not exceed 4% of compensation.
Proposed Effective Date
-47The
regulations are proposed to apply for
plan years beginning no sooner than 12
months after publication of final
regulations in the Federal Register.
However, it is
-47The
regulations are proposed to apply for
plan years beginning no sooner than 12
months after publication of final
regulations in the Federal Register.
However, it is
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory
assessment is not required. It is hereby
certified that the collection of
information in these
regulations will not have a significant
economic impact on a substantial number
of small
entities. This certification is based
upon the conclusion that few plans
containing qualified
CODAs will correct excess contributions
through the recharacterization of these
amounts
as employee contributions under
§1.401(k)-2(b)(3) of these proposed
regulations. The
collections of information contained in
§§1.401(k)-3(d), (f) and 1.401(m)-3(e)
are required
by statutory provisions. However, the
IRS has considered alternatives that
would lessen
the impact of these statutory
requirements on small entities and has
requested comments
on the use of electronic media to
satisfy these notice requirements. Thus,
the collection of
information in these regulations will
not have a significant economic impact
on a
substantial number of small entities.
Therefore, an analysis under the
Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, this
notice of proposed rulemaking will be
submitted to the Chief Counsel for
Advocacy of the
Small Business Administration for
comment on its impact on small business.
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Before these proposed regulations are
adopted as final regulations,
consideration
will be given to any electronic or
written comments (preferably a signed
original and eight
(8) copies) that are submitted timely to
the IRS. In addition to the other
requests for
comments set forth in this document, the
IRS and Treasury also request comments
on the
clarity of the proposed rule and how it
may be made easier to understand. All
comments
will be available for public inspection
and copying.
A public hearing has been scheduled for
November 12, 2003, at 10 a.m. in the IRS
Auditorium (7th Floor), Internal Revenue
Building, 1111 Constitution Avenue NW.,
Washington, DC. Due to building security
procedures, visitors must enter at the
Constitution Avenue, NW., entrance,
located between 10th and 12th Streets,
NW. In
addition, all visitors must present
photo identification to enter the
building. Because of
access restrictions, visitors will not
be admitted beyond the immediate
entrance area more
than 30 minutes before the hearing
starts. For information about having
your name placed
on the building access list to attend
the hearing, see the “FOR FURTHER
INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply
to the hearing.
Persons who wish to present oral
comments at the hearing must submit
written
comments and an outline of the topics to
be discussed and the time to be devoted
to each
topic (signed original and eight (8)
copies) by October 22, 2003.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of the
speakers will be prepared after the
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Drafting Information
The principal authors of these
regulations are R. Lisa Mojiri-Azad and
John T.
Ricotta of the Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and
Government Entities). However, other
personnel from the IRS and Treasury
participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to The Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805
26 U.S.C. 401(m)(9) * * *
Par. 2. Sections 1.401(k)-0 and
1.401(k)-1 are revised and §§1.401(k)-2
through
1.401(k)-6 are added to read as follows:
§1.401(k)-0 Table of contents.
This section contains first a list of
section headings and then a list of the
paragraphs
in each section in §§1.401(k)-1 through
1.401(k)-6.
LIST OF SECTIONS
§1.401(k)-1 Certain cash or deferred
arrangements.
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-50.
§1.401(k)-3 Safe harbor requirements.
§1.401(k)-4 SIMPLE 401(k) plan
requirements.
§1.401(k)-5 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(k)-6 Definitions.
LIST OF PARAGRAPHS
§1.401(k)-1 Certain cash or deferred
arrangements.
(a) General rules.
(1) Certain plans permitted to include
cash or deferred arrangements.
(2) Rules applicable to cash or deferred
arrangements generally.
(i) Definition of cash or deferred
arrangement.
(ii) Treatment of after-tax employee
contributions.
(iii) Treatment of ESOP dividend
election.
(iv) Treatment of elective contributions
as plan assets.
(3) Rules applicable to cash or deferred
elections generally.
(i) Definition of cash or deferred
election.
(ii) Automatic enrollment.
(iii) Rules related to timing.
(A) Requirement that amounts not be
currently available.
(B) Contribution may not precede
election.
(iv) Current availability defined.
(v) Certain one-time elections not
treated as cash or deferred elections.
(vi) Tax treatment of employees.
(vii) Examples.
(4) Rules applicable to qualified cash
or deferred arrangements.
(i) Definition of qualified cash or
deferred arrangement.
(ii) Treatment of elective contributions
as employer contributions.
(iii) Tax treatment of employees.
(iv) Application of nondiscrimination
requirements to plan that includes a
qualified cash or
deferred arrangement.
(A) Exclusive means of amounts testing.
(B) Testing benefits, rights and
features.
(C) Minimum coverage requirement.
(5) Rules applicable to nonqualified
cash or deferred arrangements.
(i) Definition of nonqualified cash or
deferred arrangement.
(ii) Treatment of elective contributions
as nonelective contributions.
(iii) Tax treatment of employees.
(iv) Qualification of plan that includes
a nonqualified cash or deferred
arrangement.
(A) In general.
(B) Application of section 401(a)(4) to
certain plans.
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-51Example.
(6) Rules applicable to cash or deferred
arrangements of self-employed
individuals.
(i) Application of general rules.
(ii) Treatment of matching contributions
made on behalf of self-employed
individuals.
(iii) Timing of self-employed
individual’s cash or deferred election.
(b) Coverage and nondiscrimination
requirements.
(1) In general.
(2) Automatic satisfaction by certain
plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
(ii) Aggregation of cash or deferred
arrangements within a plan.
(iii) Aggregation of plans.
(A) In general.
(B) Plans with inconsistent ADP testing
methods.
(iv) Disaggregation of plans and
separate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Modifications to section 410(b)
rules.
(A) Certain disaggregation rules not
applicable.
(B) Permissive aggregation of collective
bargaining units.
(C) Multiemployer plans.
(vi) Examples.
(c) Nonforfeitability requirements.
(1) General rule.
(2) Definition of immediately
nonforfeitable.
(3) Example.
(d) Distribution limitation.
(1) General rule.
(2) Rules applicable to distributions
upon severance from employment.
(3) Rules applicable to hardship
distributions.
(i) Distribution must be on account of
hardship.
(ii) Limit on maximum distributable
amount.
(A) General rule.
(B) Grandfathered amounts.
(iii) Immediate and heavy financial
need.
(A) In general.
(B) Deemed immediate and heavy financial
need.
(iv) Distribution necessary to satisfy
financial need.
(A) Distribution may not exceed amount
of need.
(B) No alternative means available.
(C) Employer reliance on employee
representation.
(D) Employee need not take
counterproductive actions.
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-52Distribution
deemed necessary to satisfy immediate
and heavy financial need.
(F) Definition of other plans.
(v) Commissioner may expand standards.
(4) Rules applicable to distributions
upon plan termination.
(i) No alternative defined contribution
plan.
(ii) Lump sum requirement for certain
distributions.
(5) Rules applicable to all
distributions.
(i) Exclusive distribution rules.
(ii) Deemed distributions.
(iii) ESOP dividend distributions.
(iv) Limitations apply after transfer.
(6) Examples.
(e) Additional requirements for
qualified cash or deferred arrangements.
(1) Qualified plan requirement.
(2) Election requirements.
(i) Cash must be available.
(ii) Frequency of elections.
(3) Separate accounting requirement.
(i) General rule.
(ii) Satisfaction of separate accounting
requirement.
(4) Limitations on cash or deferred
arrangements of state and local
governments.
(i) General rule.
(ii) Rural cooperative plans and Indian
tribal governments.
(iii) Adoption after May 6, 1986.
(iv) Adoption before May 7, 1986.
(5) One-year eligibility requirement.
(6) Other benefits not contingent upon
elective contributions.
(i) General rule.
(ii) Definition of other benefits.
(iii) Effect of certain statutory
limits.
(iv) Nonqualified deferred compensation.
(v) Plan loans and distributions.
(vi) Examples.
(7) Plan provision requirement.
(f) Effective dates.
(1) General rule.
(2) Collectively bargained plans.
§1.401(k)-2 ADP test.
(a) Actual deferral percentage (ADP)
test.
(1) In general.
(i) ADP test formula.
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-53HCEs
as sole eligible employees.
(iii) Special rule for early
participation.
(2) Determination of ADP.
(i) General rule.
(ii) Determination of applicable year
under current year and prior year
testing method.
(3) Determination of ADR.
(i) General rule.
(ii) ADR of HCEs eligible under more
than one arrangement.
(A) General rule.
(B) Plans not permitted to be
aggregated.
(iii) Examples.
(4) Elective contributions taken into
account under the ADP test.
(i) General rule.
(ii) Elective contributions for partners
and self-employed individuals.
(iii) Elective contributions for HCEs.
(5) Elective contributions not taken
into account under the ADP test.
(i) General rule.
(ii) Elective contributions for NHCEs.
(iii) Elective contributions treated as
catch-up contributions.
(iv) Elective contributions used to
satisfy the ACP test.
(6) Qualified nonelective contributions
and qualified matching contributions
that may be
taken into account under the ADP test.
(i) Timing of allocation.
(ii) Requirement that amount satisfy
section 401(a)(4).
(iii) Aggregation must be permitted.
(iv) Disproportionate contributions not
taken into account.
(A) General rule.
(B) Definition of representative
contribution rate.
(C) Definition of applicable
contribution rate.
(v) Qualified matching contributions.
(vi) Contributions only used once.
(7) Examples.
(b) Correction of excess contributions.
(1) Permissible correction methods.
(i) In general.
(A) Qualified nonelective contributions
or qualified matching contributions.
(B) Excess contributions distributed.
(C) Excess contributions
recharacterized.
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Corrections through distribution.
(i) General rule.
(ii) Calculation of total amount to be
distributed.
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-54Calculate
the dollar amount of excess
contributions for each HCE.
(B) Determination of the total amount of
excess contributions.
(C) Satisfaction of ADP.
(iii) Apportionment of total amount of
excess contributions among the HCEs.
(A) Calculate the dollar amount of
excess contributions for each HCE.
(B) Limit on amount apportioned to any
individual.
(C) Apportionment to additional HCEs.
(iv) Income allocable to excess
contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating
plan year income.
(D) Safe harbor method of allocating gap
period income.
(E) Alternative method for allocating
plan year and gap period income.
(v) Distribution.
(vi) Tax treatment of corrective
distributions.
(A) General rule.
(B) Rule for de minimis distributions.
(vii) Other rules.
(A) No employee or spousal consent
required.
(B) Treatment of corrective
distributions as elective contributions.
(C) No reduction of required minimum
distribution.
(D) Partial distributions.
(viii) Examples.
(3) Recharacterization of excess
contributions.
(i) General rule.
(ii) Treatment of recharacterized excess
contributions.
(iii) Additional rules.
(A) Time of recharacterization.
(B) Employee contributions must be
permitted under plan.
(C) Treatment of recharacterized excess
contributions.
(4) Rules applicable to all corrections.
(i) Coordination with distribution of
excess deferrals.
(A) Treatment of excess deferrals that
reduce excess contributions.
(B) Treatment of excess contributions
that reduce excess deferrals.
(ii) Forfeiture of match on distributed
excess contributions.
(iii) Permitted forfeiture of QMAC.
(iv) No requirement for recalculation.
(v) Treatment of excess contributions
that are catch-up contributions.
(5) Failure to timely correct.
(i) Failure to correct within 2½ months
after end of plan year.
(ii) Failure to correct within 12 months
after end of plan year.
(c) Additional rules for prior year
testing method.
(1) Rules for change in testing method.
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-55General
rule.
(ii) Situations permitting a change to
the prior year testing method.
(2) Calculation of ADP under the prior
year testing method for the first plan
year.
(i) Plans that are not successor plans.
(ii) First plan year defined.
(iii) Successor plans.
(3) Plans using different testing
methods for the ADP and ACP test.
(4) Rules for plan coverage changes.
(i) In general.
(ii) Optional rule for minor plan
coverage changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
(C) Weighted average of the ADPs for the
prior year subgroups.
(iv) Examples.
§1.401(k)-3 Safe harbor requirements.
(a) ADP test safe harbor.
(b) Safe harbor nonelective contribution
requirement.
(1) General rule.
(2) Safe harbor compensation defined.
(c) Safe harbor matching contribution
requirement.
(1) In general.
(2) Basic matching formula.
(3) Enhanced matching formula.
(4) Limitation on HCE matching
contributions.
(5) Use of safe harbor match not
precluded by certain plan provisions.
(i) Safe harbor matching contributions
on employee contributions.
(ii) Periodic matching contributions.
(6) Permissible restrictions on elective
contributions by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of elective
contributions.
(iv) Restrictions on types of
compensation that may be deferred.
(v) Restrictions due to limitations
under the Internal Revenue Code.
(7) Examples.
(d) Notice requirement.
(1) General rule.
(2) Content requirement.
(i) General rule.
(ii) Minimum content requirement.
(iii) References to SPD.
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-56Timing
requirement.
(i) General rule.
(ii) Deemed satisfaction of timing
requirement.
(e) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3) Change of plan year.
(4) Final plan year.
(f) Plan amendments adopting safe harbor
nonelective contributions.
(1) General rule.
(2) Contingent notice provided.
(3) Follow-up notice requirement.
(g) Permissible reduction or suspension
of safe harbor matching contributions.
(1) General rule.
(2) Notice of suspension requirement.
(h) Additional rules.
(1) Contributions taken into account.
(2) Use of safe harbor nonelective
contributions to satisfy other
nondiscrimination tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution
requirement under another defined
contribution
plan.
(5) Contributions used only once.
§1.401(k)-4 SIMPLE 401(k) plan
requirements.
(a) General rule.
(b) Eligible employer.
(1) General rule.
(2) Special rule.
(c) Exclusive plan.
(1) General rule.
(2) Special rule.
(d) Election and notice.
(1) General rule.
(2) Employee elections.
(i) Initial plan year of participation.
(ii) Subsequent plan years.
(iii) Election to terminate.
(3) Employee notices.
(e) Contributions.
(1) General rule.
(2) Elective contributions.
(3) Matching contributions.
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-57Nonelective
contributions.
(5) SIMPLE compensation.
(f) Vesting.
(g) Plan year.
(h) Other rules.
§1.401(k)-5 Special rules for mergers,
acquisitions and similar events.
[Reserved]
§1.401(k)-6 Definitions.
§1.401(k)-1 Certain cash or deferred
arrangements.
(a) General rules--(1) Certain plans
permitted to include cash or deferred
arrangements. A plan, other than a
profit-sharing, stock bonus, pre-ERISA
money
purchase pension, or rural cooperative
plan, does not satisfy the requirements
of section
401(a) if the plan includes a cash or
deferred arrangement. A profit-sharing,
stock bonus,
pre-ERISA money purchase pension, or
rural cooperative plan does not fail to
satisfy the
requirements of section 401(a) merely
because the plan includes a cash or
deferred
arrangement. A cash or deferred
arrangement is part of a plan for
purposes of this section
if any contributions to the plan, or
accruals or other benefits under the
plan, are made or
provided pursuant to the cash or
deferred arrangement.
(2) Rules applicable to cash or deferred
arrangements generally--(i) Definition
of
cash or deferred arrangement. Except as
provided in paragraphs (a)(2)(ii) and
(iii) of this
section, a cash or deferred arrangement
is an arrangement under which an
eligible
employee may make a cash or deferred
election with respect to contributions
to, or
accruals or other benefits under, a plan
that is intended to satisfy the
requirements of
section 401(a) (including a contract
that is intended to satisfy the
requirements of section
403(a)).
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-58Treatment
of after-tax employee contributions. A
cash or deferred arrangement
does not include an arrangement under
which amounts contributed under a plan
at an
employee’s election are designated or
treated at the time of contribution as
after-tax
employee contributions (e.g., by
treating the contributions as taxable
income subject to
applicable withholding requirements).
See also section 414(h)(1). This is the
case even if
the employee’s election to make
after-tax employee contributions is made
before the
amounts subject to the election are
currently available to the employee.
(iii) Treatment of ESOP dividend
election. A cash or deferred arrangement
does
not include an arrangement under an ESOP
under which dividends are either
distributed or
invested pursuant to an election made by
participants or their beneficiaries in
accordance
with section 404(k)(2)(A)(iii).
(iv) Treatment of elective contributions
as plan assets. The extent to which
elective
contributions constitute plan assets for
purposes of the prohibited transaction
provisions of
section 4975 and Title I of the Employee
Retirement Income Security Act of 1974
is
determined in accordance with
regulations and rulings issued by the
Department of Labor.
See 29 CFR 2510.3-102.
(3) Rules applicable to cash or deferred
elections generally--(i) Definition of
cash or
deferred election. A cash or deferred
election is any direct or indirect
election (or
modification of an earlier election) by
an employee to have the employer
either-(
A) Provide an amount to the employee in
the form of cash (or some other taxable
benefit) that is not currently
available; or
(B) Contribute an amount to a trust, or
provide an accrual or other benefit,
under a
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-59
(ii) Automatic enrollment. For purposes
of determining whether an election is a
cash or deferred election, it is
irrelevant whether the default that
applies in the absence of
an affirmative election is described in
paragraph (a)(3)(i)(A) of this section
(i.e., the
employee receives an amount in cash or
some other taxable benefit) or in
paragraph
(a)(3)(i)(B) of this section (i.e., the
employer contributes an amount to a
trust or provides an
accrual or other benefit under a plan
deferring the receipt of compensation).
(iii) Rules related to timing--(A)
Requirement that amounts not be
currently available.
A cash or deferred election can only be
made with respect to an amount that is
not
currently available to the employee on
the date of the election. Further, a
cash or deferred
election can only be made with respect
to amounts that would (but for the cash
or deferred
election) become currently available
after the later of the date on which the
employer
adopts the cash or deferred arrangement
or the date on which the arrangement
first
becomes effective.
(B) Contribution may not precede
election. A contribution is made
pursuant to a
cash or deferred election only if the
contribution is made after the election
is made. In
addition, a contribution is made
pursuant to a cash or deferred election
only if the
contribution is made after the
employee’s performance of services with
respect to which
the contribution is made (or when the
cash or other taxable benefit would be
currently
available, if earlier).
(iv) Current availability defined. Cash
or another taxable benefit is currently
available to the employee if it has been
paid to the employee or if the employee
is able
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(v) Certain one-time elections not
treated as cash or deferred elections. A
cash or
deferred election does not include a
one-time irrevocable election upon an
employee’s
commencement of employment with the
employer, or upon the employee’s first
becoming
eligible under the plan or any other
plan of the employer (whether or not
such other plan has
terminated), to have contributions equal
to a specified amount or percentage of
the
employee’s compensation (including no
amount of compensation) made by the
employer
on the employee’s behalf to the plan and
a specified amount or percentage of the
employee’s compensation (including no
amount of compensation) divided among
all other
plans of the employer (including plans
not yet established) for the duration of
the
employee’s employment with the employer,
or in the case of a defined benefit plan
to
receive accruals or other benefits
(including no benefits) under such
plans. Thus, for
example, employer contributions made
pursuant to a one-time irrevocable
election
described in this paragraph are not
treated as having been made pursuant to
a cash or
deferred election and are not includible
in an employee’s gross income by reason
of
§1.402(a)-1(d). In the case of an
irrevocable election made on or before
December 23,
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(A) The election does not fail to be
treated as a one-time irrevocable
election under
this paragraph (a)(3)(v) merely because
an employee was previously eligible
under
another plan of the employer (whether or
not such other plan has terminated); and
(B) In the case of a plan in which
partners may participate, the election
does not fail
to be treated as a one-time irrevocable
election under this paragraph (a)(3)(v)
merely
because the election was made after
commencement of employment or after the
employee’s first becoming eligible under
any plan of the employer, provided that
the
election was made before the first day
of the first plan year beginning after
December
31,1988, or, if later, March 31,1989.
(vi) Tax treatment of employees. An
amount generally is includible in an
employee’s
gross income for the taxable year in
which the employee actually or
constructively receives
the amount. But for sections 402(e)(3)
and 401(k), an employee is treated as
having
received an amount that is contributed
to a plan pursuant to the employee’s
cash or
deferred election. This is the case even
if the election to defer is made before
the year in
which the amount is earned, or before
the amount is currently available. See
§1.402(a)-1(d).
(vii) Examples. The following examples
illustrate the application of paragraph
(a)(3)
of this section:
Example 1. (i) An employer maintains a
profit-sharing plan under which each
eligible employee has an election to
defer an annual bonus payable on January
30 each
year. The bonus equals 10% of
compensation during the previous
calendar year. Deferred
amounts are not treated as after-tax
employee contributions. The bonus is
currently
available on January 30.
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election made prior to January 30 to
defer all or part of the bonus is a cash
or
deferred election, and the bonus
deferral arrangement is a cash or
deferred arrangement.
Example 2. (i) An employer maintains a
profit-sharing plan which provides for
discretionary profit sharing
contributions and under which each
eligible employee may
elect to reduce his compensation by up
to 10% and to have the employer
contribute such
amount to the plan. The employer pays
each employee every two weeks for
services
during the immediately preceding two
weeks. The employee’s election to defer
compensation for a payroll period must
be made prior to the date the amount
would
otherwise be paid. The employer
contributes to the plan the amount of
compensation that
each employee elected to defer, at the
time it would otherwise be paid to the
employee,
and does not treat the contribution as
an after-tax employee contribution.
(ii) The election is a cash or deferred
election and the contributions are
elective
contributions.
Example 3. (i) The facts are the same as
in Example 2, except that the employer
makes a $10,000 contribution on January
31 of the plan year that is in addition
to the
contributions that satisfy the
employer’s obligation to make
contributions with respect to
cash or deferred elections for prior
payroll periods. Employee A makes an
election on
February 15 to defer $2,000 from
compensation that is not currently
available and the
employer reduces the employee’s
compensation to reflect the election.
(ii) None of the additional $10,000
contributed January 31 is a contribution
made
pursuant to Employee A’s cash or
deferred election, because the
contribution was made
before the election was made.
Accordingly, the employer must make an
additional
contribution of $2,000 in order to
satisfy its obligation to contribute an
amount to the plan
pursuant to Employee A’s election. The
$10,000 contribution can be allocated
under the
plan terms providing for discretionary
profit sharing contributions.
Example 4. (i) The facts are the same as
in Example 3, except that Employee A
had an outstanding election to defer
$500 from each payroll period’s
compensation.
(ii) None of the additional $10,000
contributed January 31 is a contribution
made
pursuant to Employee A’s cash or
deferred election for future payroll
periods, because the
contribution was made before the earlier
of Employee A's performance of services
to
which the contribution is attributable
or when the compensation would be
currently
available. Accordingly, the employer
must make an additional contribution of
$500 per
payroll period in order to satisfy its
obligation to contribute an amount to
the plan pursuant
to Employee A’s election. The $10,000
contribution can be allocated under the
plan terms
providing for discretionary profit
sharing contributions.
Example 5. (i) Employer B establishes a
money purchase pension plan in 1986.
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(ii) The election provided under the
profit-sharing plan is not a one-time
irrevocable
election within the meaning of paragraph
(a)(3)(v) of this section with respect
to the
salaried employees of Employer B who,
before becoming eligible to participate
under the
profit-sharing plan, became eligible to
participate under the money purchase
pension plan.
The election under the profit-sharing
plan is a one-time irrevocable election
within the
meaning of paragraph (a)(3)(v) of this
section with respect to the hourly
employees,
because they were not previously
eligible to participate under another
plan of the
employer.
(4) Rules applicable to qualified cash
or deferred arrangements--(i) Definition
of
qualified cash or deferred arrangement.
A qualified cash or deferred arrangement
is a
cash or deferred arrangement that
satisfies the requirements of paragraphs
(b), (c), (d),
and (e) of this section.
(ii) Treatment of elective contributions
as employer contributions. Except as
otherwise provided in §1.401(k)-2(b)(3),
elective contributions under a qualified
cash or
deferred arrangement are treated as
employer contributions. Thus, for
example, elective
contributions are treated as employer
contributions for purposes of sections
401(a) and
401(k), 402, 404, 409, 411, 412, 415,
416, and 417.
(iii) Tax treatment of employees. Except
as provided in section 402(g), 402A
(effective for years beginning after
December 31, 2005), or 1.401(k)-2(b)(3),
elective
contributions under a qualified cash or
deferred arrangement are neither
includible in an
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(iv) Application of nondiscrimination
requirements to plan that includes a
qualified
cash or deferred arrangement--(A)
Exclusive means of amounts testing.
Elective
contributions under a qualified cash or
deferred arrangement satisfy the
requirements of
section 401(a)(4) with respect to
amounts if and only if the amount of
elective contributions
satisfies the nondiscrimination test of
section 401(k) under paragraph (b)(1) of
this section.
See §1.401(a)(4)-1(b)(2)(ii)(B).
(B) Testing benefits, rights and
features. A plan that includes a
qualified cash or
deferred arrangement must satisfy the
requirements of section 401(a)(4) with
respect to
benefits, rights and features in
addition to the requirements regarding
amounts described
in paragraph (a)(4)(iv)(A) of this
section. For example, the right to make
each level of
elective contributions under a cash or
deferred arrangement is a benefit, right
or feature
subject to the requirements of section
401(a)(4). See §1.401(a)(4)-4(e)(3)(i)
and (iii)(D).
Thus, for example, if all employees are
eligible to make a stated level of
elective
contributions under a cash or deferred
arrangement, but that level of
contributions can only
be made from compensation in excess of a
stated amount, such as the Social
Security
taxable wage base, the arrangement will
generally favor HCEs with respect to the
availability of elective contributions
and thus will generally not satisfy the
requirements of
section 401(a)(4).
(C) Minimum coverage requirement. A
qualified cash or deferred arrangement
is
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(5) Rules applicable to nonqualified
cash or deferred arrangements--(i)
Definition of
nonqualified cash or deferred
arrangement. A nonqualified cash or
deferred arrangement
is a cash or deferred arrangement that
fails to satisfy one or more of the
requirements in
paragraph (b), (c), (d) or (e) of this
section.
(ii) Treatment of elective contributions
as nonelective contributions. Except as
specifically provided otherwise,
elective contributions under a
nonqualified cash or
deferred arrangement are treated as
nonelective employer contributions.
Thus, for
example, the elective contributions are
treated as nonelective employer
contributions for
purposes of sections 401(a) (including
section 401(a)(4)) and 401(k), 404, 409,
411, 412,
415, 416, and 417 and are not subject to
the requirements of section 401(m).
(iii) Tax treatment of employees.
Elective contributions under a
nonqualified cash
or deferred arrangement are includible
in an employee’s gross income at the
time the cash
or other taxable amount that the
employee would have received (but for
the cash or
deferred election) would have been
includible in the employee’s gross
income. See
§1.402(a)-1(d)(1).
(iv) Qualification of plan that includes
a nonqualified cash or deferred
arrangement-
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general. A profit-sharing, stock bonus,
pre-ERISA money purchase pension, or
rural
cooperative plan does not fail to
satisfy the requirements of section
401(a) merely
because the plan includes a nonqualified
cash or deferred arrangement. In
determining
whether the plan satisfies the
requirements of section 401(a)(4), the
nondiscrimination
tests of sections 401(k), paragraph
(b)(1) of this section, section
401(m)(2) and
§1.401(m)-1(b) may not be used. See
§§1.401(a)(4)-1(b)(2)(ii)(B) and
1.410(b)-9
(definition of section 401(k) plan).
(B) Application of section 401(a)(4) to
certain plans. The amount of employer
contributions under a nonqualified cash
or deferred arrangement is treated as
satisfying
section 401(a)(4) if the arrangement is
part of a collectively bargained plan
that
automatically satisfies the requirements
of section 410(b). See
§§1.401(a)(4)-1(c)(5) and
1.410(b)-2(b)(7). Additionally, the
requirements of sections 401(a)(4) and
410(b) do not
apply to a governmental plan (within the
meaning of section 414(d)) maintained by
a State
or local government or political
subdivision thereof (or agency or
instrumentality thereof).
See sections 401(a)(5) and 410(c)(1)(A).
(v) Example. The following example
illustrates the application of this
paragraph
(a)(5):
Example. (i) For the 2006 plan year,
Employer A maintains a collectively
bargained
plan that includes a cash or deferred
arrangement. Employer contributions
under the cash
or deferred arrangement do not satisfy
the nondiscrimination test of section
401(k) and
paragraph (b) of this section.
(ii) The arrangement is a nonqualified
cash or deferred arrangement. The
employer
contributions under the cash or deferred
arrangement are considered to be
nondiscriminatory under section
401(a)(4), and the elective
contributions are generally
treated as employer contributions under
paragraph (a)(5)(ii) of this section.
Under
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(6) Rules applicable to cash or deferred
arrangements of self-employed
individuals
--(i) Application of general rules.
Generally, a partnership or sole
proprietorship is
permitted to maintain a cash or deferred
arrangement, and individual partners or
owners
are permitted to make cash or deferred
elections with respect to compensation
attributable to services rendered to the
entity, under the same rules that apply
to other cash
or deferred arrangements. For example,
any contributions made on behalf of an
individual
partner or owner pursuant to a cash or
deferred arrangement of a partnership or
sole
proprietorship are elective
contributions unless they are designated
or treated as after-tax
employee contributions. In the case of a
partnership, a cash or deferred
arrangement
includes any arrangement that directly
or indirectly permits individual
partners to vary the
amount of contributions made on their
behalf. Consistent with §1.402(a)-1(d),
the elective
contributions under such an arrangement
are includible in income and are not
deductible
under section 404(a) unless the
arrangement is a qualified cash or
deferred arrangement
(i.e., the requirements of section
401(k) and this section are satisfied).
Also, even if the
arrangement is a qualified cash or
deferred arrangement, the elective
contributions are
includible in gross income and are not
deductible under section 404(a) to the
extent they
exceed the applicable limit under
section 402(g). See also §1.401(a)-30.
(ii) Treatment of matching contributions
made on behalf of self-employed
individuals. Under section 402(g)(8),
matching contributions made on behalf of
a self-
employed individual are not treated as
elective contributions made pursuant to
a cash or
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(iii) Timing of self-employed
individual’s cash or deferred election.
For purposes of
paragraph (a)(3)(iv) of this section, a
partner’s compensation is deemed
currently
available on the last day of the
partnership taxable year and a sole
proprietor’s
compensation is deemed currently
available on the last day of the
individual’s taxable year.
Accordingly, a self-employed individual
may not make a cash or deferred election
with
respect to compensation for a
partnership or sole proprietorship
taxable year after the last
day of that year. See
§1.401(k)-2(a)(4)(ii) for the rules
regarding when these contributions
are treated as allocated.
(b) Coverage and nondiscrimination
requirements--(1) In general. A cash or
deferred arrangement satisfies this
paragraph (b) for a plan year only if-(
i) The group of eligible employees under
the cash or deferred arrangement
(including any employee taken into
account for purposes of section 410(b)
pursuant to
§1.401(a)(4)-11(g)(3)(vii)(A)) satisfies
the requirements of section 410(b)
(including the
average benefit percentage test, if
applicable); and
(ii) The cash or deferred arrangement
satisfies-(
A) The ADP test of section 401(k)(3)
described in §1.401(k)-2;
(B) The ADP safe harbor provisions of
section 401(k)(12) described in
§1.401(k)-3;
or
(C) The SIMPLE 401(k) provisions of
section 401(k)(11) described in
§1.401(k)-4.
(2) Automatic satisfaction by certain
plans. Notwithstanding paragraph (b)(1)
of this
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(3) Anti-abuse provisions. Sections
1.401(k)-1 through 1.401(k)-6 are
designed to
provide simple, practical rules that
accommodate legitimate plan changes. At
the same
time, the rules are intended to be
applied by employers in a manner that
does not make
use of changes in plan testing
procedures or other plan provisions to
inflate inappropriately
the ADP for NHCEs (which is used as a
benchmark for testing the ADP for HCEs)
or to
otherwise manipulate the
nondiscrimination testing requirements
of this paragraph (b).
Further, this paragraph (b) is part of
the overall requirement that benefits or
contributions
not discriminate in favor of HCEs.
Therefore, a plan will not be treated as
satisfying the
requirements of this paragraph (b) if
there are repeated changes to plan
testing
procedures or plan provisions that have
the effect of distorting the ADP so as
to increase
significantly the permitted ADP for
HCEs, or otherwise manipulate the
nondiscrimination
rules of this paragraph, if a principal
purpose of the changes was to achieve
such a result.
(4) Aggregation and restructuring--(i)
In general. This paragraph (b)(4)
contains the
exclusive rules for aggregating and
disaggregating plans and cash or
deferred
arrangements for purposes of this
section, and §§1.401(k)-2 through
1.401(k) -6.
(ii) Aggregation of cash or deferred
arrangements within a plan. Except as
otherwise specifically provided in this
paragraph (b)(4), all cash or deferred
arrangements
included in a plan are treated as a
single cash or deferred arrangement and
a plan must
apply a single test under paragraph
(b)(1)(ii) of this section with respect
to all such
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(iii) Aggregation of plans--(A) In
general. For purposes of this section
and
§§1.401(k)-2 through 1.401(k)-6, the
term plan means a plan within the
meaning of
§1.410(b)-7(a) and (b), after
application of the mandatory
disaggregation rules of
§1.410(b)-7(c), and the permissive
aggregation rules of §1.410(b)-7(d), as
modified by
paragraph (b)(4)(v) of this section.
Thus, for example, two plans (within the
meaning of
§1.410(b)-7(b)) that are treated as a
single plan pursuant to the permissive
aggregation
rules of §1.410(b)-7(d) are treated as a
single plan for purposes of section
401(k) and
section 401(m).
(B) Plans with inconsistent ADP testing
methods. Pursuant to paragraph
(b)(4)(ii)
of this section, a single testing method
must apply with respect to all cash or
deferred
arrangements under a plan. Thus, in
applying the permissive aggregation
rules of
§1.410(b)-7(d), an employer may not
aggregate plans (within the meaning of
§1.410(b)7(
b)) that apply inconsistent testing
methods. For example, a plan (within the
meaning of
§1.410(b)-7(b)) that applies the current
year testing method may not be
aggregated with
another plan that applies the prior year
testing method. Similarly, an employer
may not
aggregate a plan (within the meaning of
§1.410(b)-7(b)) using the ADP safe
harbor
provisions of section 401(k)(12) and
another plan that is using the ADP test
of section
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(iv) Disaggregation of plans and
separate testing--(A) In general. If a
cash or
deferred arrangement is included in a
plan (within the meaning of
§1.410(b)-7(b)) that is
mandatorily disaggregated under the
rules of section 410(b) (as modified by
this
paragraph (b)(4)), the cash or deferred
arrangement must be disaggregated in a
consistent manner. For example, in the
case of an employer that is treated as
operating
qualified separate lines of business
under section 414(r), if the eligible
employees under a
cash or deferred arrangement are in more
than one qualified separate line of
business,
only those employees within each
qualified separate line of business may
be taken into
account in determining whether each
disaggregated portion of the plan
complies with the
requirements of section 401(k), unless
the employer is applying the special
rule for
employer-wide plans in
§1.414(r)-1(c)(2)(ii) with respect to
the plan. Similarly, if a cash or
deferred arrangement under which
employees are permitted to participate
before they
have completed the minimum age and
service requirements of section
410(a)(1) applies
section 410(b)(4)(B) for determining
whether the plan complies with section
410(b)(1), then
the arrangement must be treated as two
separate arrangements, one comprising
all
eligible employees who have met the age
and service requirements of section
410(a)(1)
and one comprising all eligible
employees who have not met the age and
service
requirements under section 410(a)(1),
unless the plan is using the rule in
§1.401(k)2(
a)(1)(iii)(A).
(B) Restructuring prohibited.
Restructuring under §1.401(a)(4)-9(c)
may not be
used to demonstrate compliance with the
requirements of section 401(k). See
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(v) Modifications to section 410(b)
rules--(A) Certain disaggregation rules
not
applicable. The mandatory disaggregation
rules relating to section 401(k) plans
and
section 401(m) plans set forth in
§1.410(b)-7(c)(1) and ESOP and non-ESOP
portions of a
plan set forth in §1.410(b)-7(c)(2)
shall not apply for purposes of this
section and
§§1.401(k)-2 through 1.401(k)-6.
Accordingly, notwithstanding
§1.410(b)-7(d)(2), an
ESOP and a non-ESOP which are different
plans (within the meaning of
§1.410(b)-7(b))
are permitted to be aggregated for these
purposes.
(B) Permissive aggregation of collective
bargaining units. Notwithstanding the
general rule under section 410(b) and
§1.410(b)-7(c) that a plan that benefits
employees
who are included in a unit of employees
covered by a collective bargaining
agreement and
employees who are not included in the
collective bargaining unit is treated as
comprising
separate plans, an employer can treat
two or more separate collective
bargaining units as
a single collective bargaining unit for
purposes of this section and §1.401(k)-2
through
§1.401(k)-6, provided that the
combinations of units are determined on
a basis that is
reasonable and reasonably consistent
from year to year. Thus, for example, if
a plan
benefits employees in three categories
(e.g., employees included in collective
bargaining
unit A, employees included in collective
bargaining unit B, and employees who are
not
included in any collective bargaining
unit), the plan can be treated as
comprising three
separate plans, each of which benefits
only one category of employees. However,
if
collective bargaining units A and B are
treated as a single collective
bargaining unit, the
plan will be treated as comprising only
two separate plans, one benefitting all
employees
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(C) Multiemployer plans. Notwithstanding
§1.410(b)-7(c)(4)(ii)(C), the portion of
the
plan that is maintained pursuant to a
collective bargaining agreement (within
the meaning
of §1.413-1(a)(2)) is treated as a
single plan maintained by a single
employer that
employs all the employees benefitting
under the same benefit computation
formula and
covered pursuant to that collective
bargaining agreement. The rules of
paragraph
(b)(4)(v)(B) of this section (including
the permissive aggregation of collective
bargaining
units) apply to the resulting deemed
single plan in the same manner as they
would to a
single employer plan, except that the
plan administrator is substituted for
the employer
where appropriate and appropriate
fiduciary obligations are taken into
account. The
noncollectively bargained portion of the
plan is treated as maintained by one or
more
employers, depending on whether the
noncollectively bargaining unit
employees who
benefit under the plan are employed by
one or more employers.
(vi) Examples. The following examples
illustrate the application of this
paragraph
(b)(4):
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(i) Employer A maintains Plan V, a
profit-sharing plan that includes a
cash or deferred arrangement in which
all of the employees of Employer A are
eligible to
participate. For purposes of applying
section 410(b), Employer A is treated as
operating
qualified separate lines of business
under section 414(r) in accordance with
§1.414(r)-1(b). However, Employer A
applies the special rule for
employer-wide plans in
§1.414(r)-1(c)(2)(ii) to the portion of
its profit-sharing plan that consists of
elective
contributions under the cash or deferred
arrangement (and to no other plans or
portions of
plans).
(ii) Under these facts, the requirements
of this section and §§1.401(k)-2 through
1.401(k)-6 must be applied on an
employer-wide rather than a qualified
separate line of
business basis.
Example 2. (i) Employer B maintains Plan
W, a profit-sharing plan that includes a
cash or deferred arrangement in which
all of the employees of Employer B are
eligible to
participate. For purposes of applying
section 410(b), the plan treats the cash
or deferred
arrangement as two separate plans, one
for the employees who have completed the
minimum age and service eligibility
conditions under section 410(a)(1) and
the other for
employees who have not completed the
conditions. The plan provides that it
will satisfy the
section 401(k) safe harbor requirement
of §1.401(k)-3 with respect to the
employees who
have met the minimum age and service
conditions and that it will meet the ADP
test
requirements of §1.401(k)-2 with respect
to the employees who have not met the
minimum
age and service conditions.
(ii) Under these facts, the cash or
deferred arrangement must be
disaggregated on
a consistent basis with the
disaggregation of Plan W. Thus, the
requirements of
§1.401(k)-2 must be applied by comparing
the ADP for eligible HCEs who have not
completed the minimum age and service
conditions with the ADP for eligible
NHCEs for
the applicable year who have not
completed the minimum age and service
conditions.
Example 3. (i) Employer C maintains Plan
X, a stock-bonus plan including an
ESOP. The plan also includes a cash or
deferred arrangement for participants in
the
ESOP and non-ESOP portions of the plan.
(ii) Pursuant to paragraph (b)(4)(v)(A)
of this section the ESOP and non-ESOP
portions of the stock-bonus plan are a
single cash or deferred arrangement for
purposes of
this section and §§1.401(k)-2 through
1.401(k)-6. However, as provided in
paragraph
(a)(4)(iv)(C) of this section, the ESOP
and non-ESOP portions of the plan are
still treated
as separate plans for purposes of
satisfying the requirements of section
410(b).
(c) Nonforfeitability requirements--(1)
General rule. A cash or deferred
arrangement
satisfies this paragraph (c) only if the
amount attributable to an employee’s
elective
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(2) Definition of immediately
nonforfeitable. An amount is immediately
nonforfeitable if it is immediately
nonforfeitable within the meaning of
section 411, and
would be nonforfeitable under the plan
regardless of the age and service of the
employee
or whether the employee is employed on a
specific date. An amount that is subject
to
forfeitures or suspensions permitted by
section 411(a)(3) does not satisfy the
requirements of this paragraph (c).
(3) Example. The following example
illustrates the application of this
paragraph (c):
Example . (i) Employees B and C are
covered by Employer Y’s stock bonus
plan,
which includes a cash or deferred
arrangement. All employees participating
in the plan
have a nonforfeitable right to a
percentage of their account balance
derived from all
contributions (including elective
contributions) as shown in the following
table:
Years of service Nonforfeitable
percentage
Less than 1 0%
1 20%
2 40%
3 60%
4 80%
5 or more 100%
(ii) The cash or deferred arrangement
does not satisfy paragraph (c) of this
section
because elective contributions are not
immediately nonforfeitable. Thus, the
cash or
deferred arrangement is a nonqualified
cash or deferred arrangement.
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limitation--(1) General rule. A cash or
deferred arrangement
satisfies this paragraph (d) only if
amounts attributable to elective
contributions may not be
distributed before one of the following
events, and any distributions so
permitted also
satisfy the additional requirements of
paragraphs (d)(2) through (5) of this
section (to the
extent applicable)-(
i) The employee’s death, disability, or
severance from employment;
(ii) In the case of a profit-sharing,
stock bonus or rural cooperative plan,
the
employee’s attainment of age 59½, or the
employee’s hardship; or
(iii) The termination of the plan.
(2) Rules applicable to distributions
upon severance from employment. An
employee has a severance from employment
when the employee ceases to be an
employee of the employer maintaining the
plan. An employee does not have a
severance
from employment if, in connection with a
change of employment, the employee’s new
employer maintains such plan with
respect to the employee. For example, a
new employer
maintains a plan with respect to an
employee by continuing or assuming
sponsorship of
the plan or by accepting a transfer of
plan assets and liabilities (within the
meaning of
section 414(l)) with respect to the
employee).
(3) Rules applicable to hardship
distributions--(i) Distribution must be
on account of
hardship. A distribution is treated as
made after an employee’s hardship for
purposes of
paragraph (d)(1)(ii) of this section if
and only if it is made on account of the
hardship. For
purposes of this rule, a distribution is
made on account of hardship only if the
distribution
both is made on account of an immediate
and heavy financial need of the employee
and is
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immediate and heavy financial need and
of the amount necessary to meet the need
must
be made in accordance with
nondiscriminatory and objective
standards set forth in the
plan.
(ii) Limit on maximum distributable
amount--(A) General rule. A distribution
on
account of hardship must be limited to
the maximum distributable amount. The
maximum
distributable amount is equal to the
employee’s total elective contributions
as of the date of
distribution, reduced by the amount of
previous distributions of elective
contributions.
Thus, the maximum distributable amount
does not include earnings, QNECs or
QMACs,
unless grandfathered under paragraph
(d)(3)(ii)(B) of this section.
(B) Grandfathered amounts. If the plan
provides, the maximum distributable
amount
may be increased for amounts credited to
the employee’s account as of a date
specified
in the plan that is no later than
December 31, 1988, or if later, the end
of the last plan year
ending before July 1, 1989 (or in the
case of a collectively bargained plan,
the earlier of-(
1) the later of January 1, 1989, or the
date on which the last of the collective
bargaining agreements in effect on March
1, 1986 terminates (determined without
regard
to any extension thereof after February
28, 1986); or
(2) January 1, 1991) and consisting of-(
i) Income allocable to elective
contributions;
(ii) Qualified nonelective contributions
and allocable income; and
(iii) Qualified matching contributions
and allocable income.
(iii) Immediate and heavy financial
need--(A) In general. Whether an
employee has
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(B) Deemed immediate and heavy financial
need. A distribution is deemed to be
on account of an immediate and heavy
financial need of the employee if the
distribution is
for-(
1) Expenses for medical care described
in section 213(d) previously incurred by
the employee, the employee’s spouse, or
any dependents of the employee (as
defined in
section 152) or necessary for these
persons to obtain medical care described
in section
213(d);
(2) Costs directly related to the
purchase of a principal residence for
the employee
(excluding mortgage payments);
(3) Payment of tuition, related
educational fees, and room and board
expenses, for
up to the next 12 months of
post-secondary education for the
employee, or the employee’s
spouse, children, or dependents (as
defined in section 152); or
(4) Payments necessary to prevent the
eviction of the employee from the
employee’s principal residence or
foreclosure on the mortgage on that
residence.
(iv) Distribution necessary to satisfy
financial need--(A) Distribution may not
exceed
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A distribution is treated as necessary
to satisfy an immediate and heavy
financial need of an employee only to
the extent the amount of the
distribution is not in
excess of the amount required to satisfy
the financial need. For this purpose,
the amount
required to satisfy the financial need
may include any amounts necessary to pay
any
federal, state, or local income taxes or
penalties reasonably anticipated to
result from the
distribution.
(B) No alternative means available. A
distribution is not treated as necessary
to
satisfy an immediate and heavy financial
need of an employee to the extent the
need may
be relieved from other resources that
are reasonably available to the
employee. This
determination generally is to be made on
the basis of all the relevant facts and
circumstances. For purposes of this
paragraph (d)(3)(iv), the employee’s
resources are
deemed to include those assets of the
employee’s spouse and minor children
that are
reasonably available to the employee.
Thus, for example, a vacation home owned
by the
employee and the employee’s spouse,
whether as community property, joint
tenants,
tenants by the entirety, or tenants in
common, generally will be deemed a
resource of the
employee. However, property held for the
employee’s child under an irrevocable
trust or
under the Uniform Gifts to Minors Act
(or comparable State law) is not treated
as a
resource of the employee.
(C) Employer reliance on employee
representation. For purposes of
paragraph
(d)(3)(iv)(B) of this section, an
immediate and heavy financial need
generally may be
treated as not capable of being relieved
from other resources that are reasonably
available to the employee, if the
employer relies upon the employee’s
written
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(1) Through reimbursement or
compensation by insurance or otherwise;
(2) By liquidation of the employee’s
assets;
(3) By cessation of elective
contributions or employee contributions
under the plan;
(4) By other distributions or nontaxable
(at the time of the loan) loans from
plans
maintained by the employer or by any
other employer; or
(5) By borrowing from commercial sources
on reasonable commercial terms in an
amount sufficient to satisfy the need.
(D) Employee need not take
counterproductive actions. For purposes
of this
paragraph (d)(3)(iv), a need cannot
reasonably be relieved by one of the
actions
described in paragraph (d)(3)(iv)(C) of
this section if the effect would be to
increase the
amount of the need. For example, the
need for funds to purchase a principal
residence
cannot reasonably be relieved by a plan
loan if the loan would disqualify the
employee from
obtaining other necessary financing.
(E) Distribution deemed necessary to
satisfy immediate and heavy financial
need.
A distribution is deemed necessary to
satisfy an immediate and heavy financial
need of an
employee if each of the following
requirements are satisfied-(
1) The employee has obtained all
distributions, other than hardship
distributions,
and all nontaxable (at the time of the
loan) loans currently available under
the plan and all
other plans maintained by the employer;
and
(2) The employee is prohibited, under
the terms of the plan or an otherwise
legally
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(F) Definition of other plans. For
purposes of paragraph (d)(3)(iv)(C)(4)
and (E)(1)
of this section, the phrase “plans
maintained by the employer” means all
qualified and
nonqualified plans of deferred
compensation maintained by the employer,
including a cash
or deferred arrangement that is part of
a cafeteria plan within the meaning of
section 125.
However, it does not include the
mandatory employee contribution portion
of a defined
benefit plan or a health or welfare
benefit plan (including one that is part
of a cafeteria
plan). In addition, for purposes of
paragraph (d)(3)(iv)(E)(2) of this
section, the phrase
“plans maintained by the employer” also
includes a stock option, stock purchase,
or similar
plan maintained by the employer. See
§1.401(k)-6 for the continued treatment
of
suspended employees as eligible
employees.
(v) Commissioner may expand standards.
The Commissioner may prescribe
additional guidance of general
applicability, published in the Internal
Revenue Bulletin (see
601.601(d)(2) of this chapter),
expanding the list of deemed immediate
and heavy financial
needs and prescribing additional methods
for distributions to be deemed necessary
to
satisfy an immediate and heavy financial
need.
(4) Rules applicable to distributions
upon plan termination--(i) No
alternative defined
contribution plan. A distribution may
not be made under paragraph (d)(1)(iii)
of this section
if the employer establishes or maintains
an alternative defined contribution
plan. For
purposes of the preceding sentence, the
definition of the term “employer”
contained in
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(ii) Lump sum requirement for certain
distributions. A distribution may be
made
under paragraph (d)(1)(iii) of this
section only if it is a lump sum
distribution. The term lump
sum distribution has the meaning
provided in section 402(e)(4)(D)
(without regard to
section 402(e)(4)(D)(i)(I), (II), (III)
and (IV)). In addition, a lump sum
distribution includes a
distribution of an annuity contract from
a trust that is part of a plan described
in section
401(a) and which is exempt from tax
under section 501(a) or an annuity plan
described in
403(a).
(5) Rules applicable to all
distributions--(i) Exclusive
distribution rules. Amounts
attributable to elective contributions
may not be distributed on account of any
event not
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(d) does not apply to a distribution of
excess annual additions pursuant to
§1.4156(
b)(6)(iv).
(ii) Deemed distributions. The cost of
life insurance (determined under section
72)
is not treated as a distribution for
purposes of section 401(k)(2) and this
paragraph (d).
The making of a loan is not treated as a
distribution, even if the loan is
secured by the
employee’s accrued benefit attributable
to elective contributions or is
includible in the
employee’s income under section 72(p).
However, the reduction, by reason of
default on a
loan, of an employee’s accrued benefit
derived from elective contributions is
treated as a
distribution.
(iii) ESOP dividend distributions. A
plan does not fail to satisfy the
requirements of
this paragraph (d) merely by reason of a
dividend distribution described in
section
404(k)(2).
(iv) Limitations apply after transfer.
The limitations of this paragraph (d)
generally
continue to apply to amounts
attributable to elective contributions
(including QNECs and
qualified matching contributions taken
into account for the ADP test under
§1.401(k)
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(6) Examples. The following examples
illustrate the application of this
paragraph
(d):
Example 1. Employer M maintains Plan V,
a profit-sharing plan that includes a
cash or deferred arrangement. Elective
contributions under the arrangement may
be
withdrawn for any reason after two years
following the end of the plan year in
which the
contributions were made. Because the
plan permits distributions of elective
contributions
before the occurrence of one of the
events specified in section 401(k)(2)(B)
and this
paragraph (d), the cash or deferred
arrangement is a nonqualified cash or
deferred
arrangement and the elective
contributions are currently includible
in income under section
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-85.
Example 2. (i) Employer N maintains Plan
W, a profit-sharing plan that includes a
cash or deferred arrangement. Plan W
provides for distributions upon a
participant’s
severance from employment, death or
disability. All employees of Employer N
and its
wholly owned subsidiary, Employer O, are
eligible to participate in Plan W.
Employer N
agrees to sell all issued and
outstanding shares of Employer O to an
unrelated entity,
Employer T, effective on December 31,
2006. Following the transaction,
Employer O will
be a wholly owned subsidiary of Employer
T. Additionally, individuals who are
employed
by Employer O on the effective date of
the sale continue to be employed by
Employer O
following the sale. Following the
transaction, all employees of Employer O
will cease to
participate in Plan W and will become
eligible to participate in the cash or
deferred
arrangement maintained by Employer T,
Plan X. No assets will be transferred
from Plan
W to Plan X, except in the case of a
direct rollover within the meaning of
section
401(a)(31).
(ii) Employer O ceases to be a member of
Employer N’s controlled group as a
result of the sale. Therefore, employees
of Employer O who participated in Plan W
will
have a severance from employment and are
eligible to receive a distribution from
Plan W.
Example 3. (i) Employer Q maintains Plan
Y, a profit-sharing plan that includes a
cash or deferred arrangement. Plan Y,
the only plan maintained by Employer Q,
does not
provide for loans. However, Plan Y
provides that elective contributions
under the
arrangement may be distributed to an
eligible employee on account of hardship
using the
deemed immediate and heavy financial
need provisions of paragraph
(d)(3)(iii)(B) of this
section and provisions regarding
distributions necessary to satisfy
financial need of
paragraphs (d)(3)(iv)(A) through (D) of
this section. Employee A is an eligible
employee in
Plan Y with an account balance of
$50,000 attributable to elective
contributions made by
Employee A. The total amount of elective
contributions made by Employee A, who
has not
previously received a distribution from
Plan Y, is $20,000. Employee A requests
a
$15,000 hardship distribution of his
elective contributions to pay 6 months
of college tuition
and room and board expenses for his
dependent child. At the time of the
distribution
request, the sole asset of Employee A
(that is reasonably available to
Employee A within
the meaning of paragraph (d)(3)(iv)(B)
of this section) is a savings account
with an
available balance of $10,000.
(ii) A distribution is made on account
of hardship only if the distribution
both is
made on account of an immediate and
heavy financial need of the employee and
is
necessary to satisfy the financial need.
Under paragraph (d)(3)(iii)(B) of this
section, a
distribution for payment of up to the
next 12 months of post-secondary
education and room
and board expenses for Employee A’s
dependant child is deemed to be on
account of an
immediate and heavy financial need of
Employee A.
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distribution is treated as necessary to
satisfy Employee A’s immediate and
heavy financial need to the extent the
need may not be relieved from other
resources
reasonably available to Employee A.
Under paragraph (d)(3)(iv)(B) of this
section,
Employee A’s $10,000 savings account is
a resource that is reasonably available
to the
employee and must be taken into account
in determining the amount necessary to
satisfy
Employee A’s immediate and heavy
financial need. Thus, Employee A may
receive a
distribution of only $5,000 of his
elective contributions on account of
this hardship, plus an
amount necessary to pay any federal,
state, or local income taxes or
penalties reasonably
anticipated to result from the
distribution.
Example 4. (i) The facts are the same as
in Example 3. Employee B, another
employee of Employer Q has an account
balance of $25,000, attributable to
Employee B’s
elective contributions. The total amount
of elective contributions made by
Employee B,
who has not previously received a
distribution from Plan Y, is $15,000.
Employee B
requests a $10,000 distribution of his
elective contributions to pay 6 months
of college
tuition and room and board expenses for
his dependent child. Employee B makes a
written representation (with respect to
which Employer Q has no actual knowledge
to the
contrary) that the need cannot
reasonably be relieved: 1) through
reimbursement or
compensation by insurance or otherwise;
2) by liquidation of the employee’s
assets; 3) by
cessation of elective contributions or
employee contributions under the plan;
4) by other
distributions or nontaxable (at the time
of the loan) loans from plans maintained
by the
employer or by any other employer; or 5)
by borrowing from commercial sources on
reasonable commercial terms in an amount
sufficient to satisfy the need.
(ii) Under paragraph (d)(3)(iii)(B) of
this section, a distribution for payment
of up to
the next 12 months of post-secondary
education and room and board expenses
for
Employee B’s dependant child is deemed
to be on account of an Employee B’s
immediate and heavy financial need. In
addition, because Employer Q can rely on
Employee B’s written representation, the
distribution is considered necessary to
satisfy
Employee B’s immediate and heavy
financial need. Therefore, Employee B
may receive a
$10,000 distribution of his elective
contributions on account of hardship
plus an amount
necessary to pay any federal, state, or
local income taxes or penalties
reasonably
anticipated to result from the
distribution.
Example 5. (i) The facts are the same as
in Example 3, except Plan Y provides for
hardship distributions using the safe
harbor rule of paragraph (d)(3)(iv)(E)
of this section.
Accordingly, Plan Y provides for a 6
month suspension of an eligible
employee’s elective
contributions and employee contributions
to the plan after the receipt of a
hardship
distribution by such eligible employee.
(ii) Under paragraph (d)(3)(iii)(B) of
this section, a distribution for payment
of up to
the next 12 months of post-secondary
education and room and board expenses
for
Employee A’s dependant child is deemed
to be on account of an Employee A’s
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Example 6. Employer R maintains a
pre-ERISA money purchase pension plan
that
includes a cash or deferred arrangement
that is not a rural cooperative plan.
Elective
contributions under the arrangement may
be distributed to an employee on account
of
hardship. Under paragraph (d)(1) of this
section, hardship is a permissible
distribution
event only in a profit-sharing, stock
bonus or rural cooperative plan. Since
elective
contributions under the arrangement may
be distributed before a permissible
distribution
event occurs, the cash or deferred
arrangement does not satisfy this
paragraph (d), and is
not a qualified cash or deferred
arrangement. Moreover, the plan is not a
qualified plan
because a money purchase pension plan
may not provide for payment of benefits
upon
hardship. See §1.401-1(b)(1)(i).
(e) Additional requirements for
qualified cash or deferred
arrangements--(1)
Qualified plan requirement. A cash or
deferred arrangement satisfies this
paragraph (e)
only if the plan of which it is a part
is a profit-sharing, stock bonus,
pre-ERISA money
purchase or rural cooperative plan that
otherwise satisfies the requirements of
section
401(a) (taking into account the cash or
deferred arrangement). A plan that
includes a cash
or deferred arrangement may provide for
other contributions, including employer
contributions (other than elective
contributions), employee contributions,
or both. However,
except as expressly permitted under
section 401(m), 410(b)(2)(A)(ii) or
416(c)(2)(A),
elective contributions and matching
contributions taken into account under
§1.401(k)-2(a)
may not be taken into account for
purposes of determining whether any
other contributions
under any plan (including the plan to
which the contributions are made)
satisfy the
requirements of section 401(a).
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requirements--(i) Cash must be
available. A cash or deferred
arrangement satisfies this paragraph (e)
only if the arrangement provides that
the amount
that each eligible employee may defer as
an elective contribution is available to
the
employee in cash. Thus, for example, if
an eligible employee is provided the
option to
receive a taxable benefit (other than
cash) or to have the employer contribute
on the
employee’s behalf to a profit-sharing
plan an amount equal to the value of the
taxable
benefit, the arrangement is not a
qualified cash or deferred arrangement.
Similarly, if an
employee has the option to receive a
specified amount in cash or to have the
employer
contribute an amount in excess of the
specified cash amount to a
profit-sharing plan on the
employee’s behalf, any contribution made
by the employer on the employee’s behalf
in
excess of the specified cash amount is
not treated as made pursuant to a
qualified cash or
deferred arrangement. This cash
availability requirement applies even if
the cash or
deferred arrangement is part of a
cafeteria plan within the meaning of
section 125.
(ii) Frequency of elections. A cash or
deferred arrangement satisfies this
paragraph (e) only if the arrangement
provides an employee with an effective
opportunity
to make (or change) a cash or deferred
election at least once during each plan
year.
Whether an employee has an effective
opportunity is determined based on all
the relevant
facts and circumstances, including
notice of the availability of the
election, the period of
time during which an election may be
made, and any other conditions on
elections.
(3) Separate accounting requirement--(i)
General rule. A cash or deferred
arrangement satisfies this paragraph (e)
only if the portion of an employee’s
benefit
subject to the requirements of
paragraphs (c) and (d) of this section
is determined by an
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(ii) Satisfaction of separate accounting
requirement. The requirements of
paragraph (e)(3)(i) of this section are
treated as satisfied if all amounts held
under a plan
that includes a cash or deferred
arrangement (and, if applicable, under
another plan to
which QNECs and QMACs are made) are
subject to the requirements of
paragraphs (c)
and (d) of this section.
(4) Limitations on cash or deferred
arrangements of state and local
governments-(
i) General rule. A cash or deferred
arrangement does not satisfy the
requirements of this
paragraph (e) if the arrangement is
adopted after May 6, 1986, by a State or
local
government or political subdivision
thereof, or any agency or
instrumentality thereof (a
governmental unit). For purposes of this
paragraph (e)(4), an employer that has
made a
legally binding commitment to adopt a
cash or deferred arrangement is treated
as having
adopted the arrangement on that date.
(ii) Rural cooperative plans and Indian
tribal governments. This paragraph
(e)(4)
does not apply to a rural cooperative
plan or to a plan of an employer which
is an Indian
tribal government (as defined in section
7701(a)(40)), a subdivision of an Indian
tribal
government (determined in accordance
with section 7871(d)), an agency or
instrumentality
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(iii) Adoption after May 6, 1986. A cash
or deferred arrangement is treated as
adopted after May 6, 1986, with respect
to all employees of any employer that
adopts the
arrangement after such date.
(iv) Adoption before May 7, 1986. If a
governmental unit adopted a cash or
deferred arrangement before May 7, 1986,
then any cash or deferred arrangement
adopted by the unit at any time is
treated as adopted before that date. If
an employer
adopted an arrangement prior to such
date, all employees of the employer may
participate
in the arrangement.
(5) One-year eligibility requirement. A
cash or deferred arrangement satisfies
this
paragraph (e) only if no employee is
required to complete a period of service
with the
employer maintaining the plan extending
beyond the period permitted under
section
410(a)(1) (determined without regard to
section 410(a)(1)(B)(i)) to be eligible
to make a
cash or deferred election under the
arrangement.
(6) Other benefits not contingent upon
elective contributions--(i) General
rule. A
cash or deferred arrangement satisfies
this paragraph (e) only if no other
benefit is
conditioned (directly or indirectly)
upon the employee’s electing to make or
not to make
elective contributions under the
arrangement. The preceding sentence does
not apply to -(
A) Any matching contribution (as defined
in §1.401(m)-1(a)(2)) made by reason of
such an election;
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benefit, right or feature (such as a
plan loan) that requires, or results in,
an
amount to be withheld from an employee’s
pay (e.g. to pay for the benefit or to
repay the
loan), to the extent the cash or
deferred arrangement restricts elective
contributions to
amounts available after such withholding
from the employee’s pay (after deduction
of all
applicable income and employment taxes);
(C) Any reduction in the employer’s
top-heavy contributions under section
416(c)(2)
because of matching contributions that
resulted from the elective
contributions; or
(D) Any benefit that is provided at the
employee’s election under a plan
described
in section 125(d) in lieu of an elective
contribution under a qualified cash or
deferred
arrangement.
(ii) Definition of other benefits. For
purposes of this paragraph (e)(6), other
benefits
include, but are not limited to,
benefits under a defined benefit plan;
nonelective
contributions under a defined
contribution plan; the availability,
cost, or amount of health
benefits; vacations or vacation pay;
life insurance; dental plans; legal
services plans; loans
(including plan loans); financial
planning services; subsidized retirement
benefits; stock
options; property subject to section 83;
and dependent care assistance. Also,
increases
in salary and bonuses (other than those
actually subject to the cash or deferred
election)
are benefits for purposes of this
paragraph (e)(6). The ability to make
after-tax employee
contributions is a benefit, but that
benefit is not contingent upon an
employee’s electing to
make or not make elective contributions
under the arrangement merely because the
amount of elective contributions reduces
dollar-for-dollar the amount of
after-tax employee
contributions that may be made.
Additionally, benefits under any other
plan or
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(iii) Effect of certain statutory
limits. Any benefit under an excess
benefit plan
described in section 3(36) of the
Employee Retirement Income Security Act
of 1974 that is
dependent on the employee’s electing to
make or not to make elective
contributions is not
treated as contingent.
(iv) Nonqualified deferred compensation.
Participation in a nonqualified deferred
compensation plan is treated as
contingent for purposes of this
paragraph (e)(6) only to
the extent that an employee may receive
additional deferred compensation under
the
nonqualified plan to the extent the
employee makes or does not make elective
contributions. Deferred compensation
under a nonqualified plan of deferred
compensation that is dependent on an
employee’s having made the maximum
elective
deferrals under section 402(g) or the
maximum elective contributions permitted
under the
terms of the plan also is not treated as
contingent.
(v) Plan loans and distributions. A loan
or distribution of elective
contributions is not
a benefit conditioned on an employee’s
electing to make or not make elective
contributions under the arrangement
merely because the amount of the loan or
distribution
is based on the amount of the employee’s
account balance.
(vi) Examples. The following examples
illustrate the application of this
paragraph
(e)(6):
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-93.
Employer T maintains a cash or deferred
arrangement for all of its
employees. Employer T also maintains a
nonqualified deferred compensation plan
for two
highly paid executives, Employees R and
C. Under the terms of the nonqualified
deferred
compensation plan, R and C are eligible
to participate only if they do not make
elective
contributions under the cash or deferred
arrangement. Participation in the
nonqualified
plan is a contingent benefit for
purposes of this paragraph (e)(6),
because R’s and C’s
participation is conditioned on their
electing not to make elective
contributions under the
cash or deferred arrangement.
Example 2. Employer T maintains a cash
or deferred arrangement for all its
employees. Employer T also maintains a
nonqualified deferred compensation plan
for two
highly paid executives, Employees R and
C. Under the terms of the arrangements,
Employees R and C may defer a maximum of
10% of their compensation, and may
allocate their deferral between the cash
or deferred arrangement and the
nonqualified
deferred compensation plan in any way
they choose (subject to the overall 10%
maximum).
Because the maximum deferral available
under the nonqualified deferred
compensation
plan depends on the elective deferrals
made under the cash or deferred
arrangement, the
right to participate in the nonqualified
plan is a contingent benefit for
purposes of
paragraph (e)(6).
(7) Plan provision requirement. A plan
that includes a cash or deferred
arrangement satisfies this paragraph (e)
only if it provides that the
nondiscrimination
requirements of section 401(k) will be
met. Thus, the plan must provide for
satisfaction of
one of the specific alternatives
described in paragraph (b)(1)(ii) of
this section and, if with
respect to that alternative there are
optional choices, which of the optional
choices will
apply. For example, a plan that uses the
ADP test of section 401(k)(3), as
described in
paragraph (b)(1)(ii)(A) of this section,
must specify whether it is using the
current year
testing method or prior year testing
method. Additionally, a plan that uses
the prior year
testing method must specify whether the
ADP for eligible NHCEs for the first
plan year is
3% or the ADP for the eligible NHCEs for
the first plan year. Similarly, a plan
that uses the
safe harbor method of section
401(k)(12), as described in paragraph
(b)(1)(ii)(B) of this
section, must specify whether the safe
harbor contribution will be the
nonelective safe
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(f) Effective dates--(1) General rule.
This section and §§1.401(k)-2 through
1.401(k)-6 apply to plan years that
begin on or after the date that is 12
months after the
issuance of these regulations in final
form, except as otherwise provided in
this paragraph
(f).
(2) Collectively bargained plans. In the
case of a plan maintained pursuant to
one
or more collective bargaining agreements
between employee representatives and one
or
more employers in effect on the date
described in paragraph (f)(1) of this
section, the
provisions of this section and
§§1.401(k)-2 through 1.401(k)-6 apply to
the later of the first
plan year beginning after the
termination of the last such agreement
or the plan year
described in paragraph (f)(1) of this
section.
§1.401(k)-2 ADP test.
(a) Actual deferral percentage (ADP)
test--(1) In general--(i) ADP test
formula. A
cash or deferred arrangement satisfies
the ADP test for a plan year only if-(
A) The ADP for the eligible HCEs for the
plan year is not more than the ADP for
the
eligible NHCEs for the applicable year
multiplied by 1.25; or
(B) The excess of the ADP for the
eligible HCEs for the plan year over the
ADP for
the eligible NHCEs for the applicable
year is not more than 2 percentage
points, and the
ADP for the eligible HCEs for the plan
year is not more than the ADP for the
eligible
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(ii) HCEs as sole eligible employees.
If, for the applicable year for
determining the
ADP of the NHCEs for a plan year, there
are no eligible NHCEs (i.e, all of the
eligible
employees under the cash or deferred
arrangement for the applicable year are
HCEs), the
arrangement is deemed to satisfy the ADP
test for the plan year.
(iii) Special rule for early
participation. If a cash or deferred
arrangement provides
that employees are eligible to
participate before they have completed
the minimum age
and service requirements of section
410(a)(1)(A), and if the plan applies
section
410(b)(4)(B) in determining whether the
cash or deferred arrangement meets the
requirements of section 410(b)(1), then
in determining whether the arrangement
meets the
requirements under paragraph (a)(1) of
this section, either-(
A) Pursuant to section 401(k)(3)(F), the
ADP test is performed under the plan
(determined without regard to
disaggregation under §1.410(b)-7(c)(3)),
using the ADP for
all eligible HCEs for the plan year and
the ADP of eligible NHCEs for the
applicable year,
disregarding all NHCEs who have not met
the minimum age and service requirements
of
section 410(a)(1)(A); or
(B) Pursuant to §1.401(k)-1(b)(4), the
plan is disaggregated into separate
plans
and the ADP test is performed separately
for all eligible employees who have
completed
the minimum age and service requirements
of section 410(a)(1)(A) and for all
eligible
employees who have not completed the
minimum age and service requirements of
section
410(a)(1)(A).
(2) Determination of ADP--(i) General
rule. The ADP for a group of eligible
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(ii) Determination of applicable year
under current year and prior year
testing
method. The ADP test is applied using
the prior year testing method or the
current year
testing method. Under the prior year
testing method, the applicable year for
determining
the ADP for the eligible NHCEs is the
plan year immediately preceding the plan
year for
which the ADP test is being performed.
Under the prior year testing method, the
ADP for
the eligible NHCEs is determined using
the ADRs for the eligible employees who
were
NHCEs in that preceding plan year,
regardless of whether those NHCEs are
eligible
employees or NHCEs in the plan year for
which the ADP test is being calculated.
Under
the current year testing method, the
applicable year for determining the ADP
for the
eligible NHCEs is the same plan year as
the plan year for which the ADP test is
being
performed. Under either method, the ADP
for eligible HCEs is the average of the
ADRs of
the eligible HCEs for the plan year for
which the ADP test is being performed.
See
paragraph (c) of this section for
additional rules for the prior year
testing method.
(3) Determination of ADR--(i) General
rule. The ADR of an eligible employee
for a
plan year or applicable year is the sum
of the employee’s elective contributions
taken into
account with respect to such employee
for the year, determined under the rules
of
paragraphs (a)(4) and (5) of this
section, and the qualified nonelective
contributions and
qualified matching contributions taken
into account with respect to such
employee under
paragraph (a)(6) of this section for the
year, divided by the employee’s
compensation
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(ii) ADR of HCEs eligible under more
than one arrangement--(A) General rule.
Pursuant to section 401(k)(3)(A), the
ADR of an HCE who is an eligible
employee in more
than one cash or deferred arrangement of
the same employer is calculated by
treating all
contributions with respect to such HCE
under any such arrangement as being made
under
the cash or deferred arrangement being
tested. Thus, the ADR for such an HCE is
calculated by accumulating all
contributions under any cash or deferred
arrangement (other
than a cash or deferred arrangement
described in paragraph (a)(3)(ii)(B) of
this section)
that would be taken into account under
this section for the plan year, if the
cash or deferred
arrangement under which the contribution
was made applied this section and had
the
same plan year. For example, in the case
of a plan with a 12-month plan year, the
ADR for
the plan year of that plan for an HCE
who participates in multiple cash or
deferred
arrangements of the same employer is the
sum of all contributions during such
12-month
period that would be taken into account
with respect to the HCE under all such
arrangements in which the HCE is an
eligible employee, divided by the HCE’s
compensation for that 12-month period
(determined using the compensation
definition for
the plan being tested), without regard
to the plan year of the other plans and
whether those
plans are satisfying this section or
§1.401(k)-3.
(B) Plans not permitted to be
aggregated. Cash or deferred
arrangements under
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regard to the prohibition on aggregating
plans with inconsistent testing methods
set forth in
§1.401(k)-1(b)(4)(iii)(B) and the
prohibition on aggregating plans with
different plan years
set forth in §1.410(b)-7(d)(5)) are not
aggregated under this paragraph
(a)(3)(ii).
(iii) Examples. The following examples
illustrate the application of this
paragraph
(a)(3):
Example 1. (i) Employee A, an HCE with
compensation of $120,000, is eligible to
make elective contributions under Plan S
and Plan T, two profit-sharing plans
maintained
by Employer H with calendar year plan
years, each of which includes a cash or
deferred
arrangement. During the current plan
year, Employee A makes elective
contributions of
$6,000 to Plan S and $4,000 to Plan T.
(ii) Under each plan, the ADR for
Employee A is determined by dividing
Employee
A’s total elective contributions under
both arrangements by Employee A’s
compensation
taken into account under the plan for
the year. Therefore, Employee A’s ADR
under each
plan is 8.33% ($10,000/$120,000).
Example 2. (i) The facts are the same as
in Example 1, except that Plan T defines
compensation (for deferral and testing
purposes) to exclude all bonuses paid to
an
employee. Plan S defines compensation
(for deferral and testing purposes) to
include
bonuses paid to an employee. During the
current year, Employee A’s compensation
included a $10,000 bonus. Therefore,
Employee A’s compensation under Plan T
is
$110,000 and Employee A’s compensation
under Plan S is $120,000.
(ii) Employee A’s ADR under Plan T is
9.09% ($10,000/$110,000) and under Plan
S, Employee A’s ADR is 8.33%
($10,000/$120,000).
Example 3. (i) Employer J sponsors two
profit-sharing plans, Plan U and Plan V,
each of which includes a cash or
deferred arrangement. Plan U’s plan year
begins on July
1 and ends on June 30. Plan V has a
calendar year plan year. Compensation
under both
plans is limited to the participant’s
compensation during the period of
participation.
Employee B is an HCE who participates in
both plans. Employee B’s monthly
compensation and elective contributions
to each plan for the 2005 and 2006
calendar
years are as follows:
-99
-99Monthly
Compensation
Monthly Elective
Contribution to Plan U
Monthly Elective
Contribution to Plan V
2005 $10,000 $500 $400
2006 $11,500 $700 $550
(ii) Under Plan U, Employee B’s ADR for
the plan year ended June 30, 2006, is
equal to Employee B’s total elective
contributions under Plan U and Plan V
for the plan
year ending June 30, 2006 divided by
Employee B’s compensation for that
period.
Therefore, Employee B’s ADR under Plan U
for the plan year ending June 30, 2006,
is
(($900 x 6) + ($1,250 x 6 )) / (($10,000
x 6) + ($11,500 x 6)), or 10%.
(iii) Under Plan V, Employee B’s ADR for
the plan year ended December 31,
2005, is equal to total elective
contributions under Plan U and V for the
plan year ending
December 31, 2005, divided by Employee
B’s compensation for that period.
Therefore,
Employee B’s ADR under Plan V for the
plan year ending December 31, 2005, is
($10,800/$120,000), or 9%.
Example 4. (i) The facts are the same as
Example 3, except that Employee B first
becomes eligible to participate in Plan
U on January 1, 2006.
(ii) Under Plan U, Employee B’s ADR for
the plan year ended June 30, 2006, is
equal to Employee B’s total elective
contributions under Plan U and V for the
plan year
ending June 30, 2006, divided by
Employee B’s compensation for that
period. Therefore,
Employee B’s ADR under Plan U for the
plan year ending June 30, 2006, is
(($400 x 6)+
($1,250 x 6 )) / (($10,000 x 6) +
($11,500 x 6)), or 7.67%.
(4) Elective contributions taken into
account under the ADP test--(i) General
rule. An
elective contribution is taken into
account in determining the ADR for an
eligible employee
for a plan year or applicable year only
if each of the following requirements is
satisfied:
(A) The elective contribution is
allocated to the eligible employee’s
account under
the plan as of a date within that year.
For purposes of this rule, an elective
contribution is
considered allocated as of a date within
a year only if-
(1) The allocation is not contingent on
the employee’s participation in the plan
or
performance of services on any date
subsequent to that date; and
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The elective contribution is actually
paid to the trust no later than the end
of the
12-month period immediately following
the year to which the contribution
relates.
(B) The elective contribution relates to
compensation that either-(
1) Would have been received by the
employee in the year but for the
employee’s
election to defer under the arrangement;
or
(2) Is attributable to services
performed by the employee in the year
and, but for the
employee’s election to defer, would have
been received by the employee within 2½
months after the close of the year, but
only if the plan so provides for
elective contributions
that relate to compensation that would
have been received after the close of a
year to be
allocated to such prior year rather than
the year in which the compensation would
have
been received.
(ii) Elective contributions for partners
and self-employed individuals. For
purposes
of this paragraph (a)(4), a partner’s
distributive share of partnership income
is treated as
received on the last day of the
partnership taxable year and a sole
proprietor’s
compensation is treated as received on
the last day of the individual’s taxable
year. Thus,
an elective contribution made on behalf
of a partner or sole proprietor is
treated as
allocated to the partner’s account for
the plan year that includes the last day
of the
partnership taxable year, provided the
requirements of paragraph (a)(4)(i) of
this section
are met.
(iii) Elective contributions for HCEs.
Elective contributions of an HCE must
include
any excess deferrals, as described in
§1.402(g)-1(a), even if those excess
deferrals are
distributed, pursuant to §1.402(g)-1(e).
-101
-101Elective
contributions not taken into account
under the ADP test--(i) General
rule. Elective contributions that do not
satisfy the requirements of paragraph
(a)(4)(i) of this
section may not be taken into account in
determining the ADR of an eligible
employee for
the plan year or applicable year with
respect to which the contributions were
made, or for
any other plan year. Instead, the amount
of the elective contributions must
satisfy the
requirements of section 401(a)(4)
(without regard to the ADP test) for the
plan year for
which they are allocated under the plan
as if they were nonelective
contributions and were
the only nonelective contributions for
that year. See
§§1.401(a)(4)-1(b)(2)(ii)(B) and
1.410(b)-7(c)(1).
(ii) Elective contributions for NHCEs.
Elective contributions of an NHCE shall
not
include any excess deferrals, as
described in §1.402(g)-1(a), to the
extent the excess
deferrals are prohibited under section
401(a)(30). However, to the extent that
the excess
deferrals are not prohibited under
section 401(a)(30), they are included in
elective
contributions even if distributed
pursuant to §1.402(g)-1(e).
(iii) Elective contributions treated as
catch-up contributions. Elective
contributions
that are treated as catch-up
contributions under section 414(v)
because they exceed a
statutory limit or employer-provided
limit (within the meaning of
§1.414(v)-1(b)(1)) are not
taken into account under paragraph
(a)(4) of this section for the plan year
for which the
contributions were made, or for any
other plan year.
(iv) Elective contributions used to
satisfy the ACP test. Except to the
extent
necessary to demonstrate satisfaction of
the requirement of
§1.401(m)-2(a)(6)(ii), elective
contributions taken into account for the
ACP test under §1.401(m)-2(a)(6) are not
taken
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(6) Qualified nonelective contributions
and qualified matching contributions
that may
be taken into account under the ADP
test. Qualified nonelective
contributions and
qualified matching contributions may be
taken into account in determining the
ADR for an
eligible employee for a plan year or
applicable year but only to the extent
the contributions
satisfy the following requirements.
(i) Timing of allocation. The qualified
nonelective contribution or qualified
matching
contribution is allocated to the
employee’s account as of a date within
that year within the
meaning of paragraph (a)(4)(i)(A) of
this section. Consequently, under the
prior year
testing method, in order to be taken
into account in calculating the ADP for
the eligible
NHCEs for the applicable year, a
qualified nonelective contribution or
qualified matching
contribution must be contributed no
later than the end of the 12-month
period immediately
following the applicable year even
though the applicable year is different
than the plan year
being tested.
(ii) Requirement that amount satisfy
section 401(a)(4). The amount of
nonelective
contributions, including those qualified
nonelective contributions taken into
account under
this paragraph (a)(6) and those
qualified nonelective contributions
taken into account for
the ACP test of section 401(m)(2) under
§1.401(m)-2(a)(6), satisfies the
requirements of
section 401(a)(4). See
§1.401(a)(4)-1(b)(2). The amount of
nonelective contributions,
excluding those qualified nonelective
contributions taken into account under
this paragraph
(a)(6) and those qualified nonelective
contributions taken into account for the
ACP test of
section 401(m)(2) under
§1.401(m)-2(a)(6), satisfies the
requirements of section
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(iii) Aggregation must be permitted. The
plan that contains the cash or deferred
arrangement and the plan or plans to
which the qualified nonelective
contributions or
qualified matching contributions are
made, are plans that would be permitted
to be
aggregated under §1.401(k)-1(b)(4). If
the plan year of the plan that contains
the cash or
deferred arrangement is changed to
satisfy the requirement under
§1.410(b)-7(d)(5) that
aggregated plans have the same plan
year, qualified nonelective
contributions and
qualified matching contributions may be
taken into account in the resulting
short plan year
only if such qualified nonelective
contributions and qualified matching
contributions could
have been taken into account under an
ADP test for a plan with the same short
plan year.
-104
-104Disproportionate
contributions not taken into
account--(A) General rule.
Qualified nonelective contributions
cannot be taken into account for a plan
year for an
NHCE to the extent such contributions
exceed the product of that NHCE’s
compensation
and the greater of 5% or two times the
plan's representative contribution rate.
Any
qualified nonelective contribution taken
into account under an ACP test under
§1.401(m)2(
a)(6) (including the determination of
the representative contribution rate for
purposes of
§1.401(m)-2(a)(6)(v)(B)), is not
permitted to be taken into account for
purposes of this
paragraph (a)(6) (including the
determination of the representative
contribution rate under
paragraph (a)(6)(iv)(B) of this
section).
(B) Definition of representative
contribution rate. For purposes of this
paragraph
(a)(6)(iv), the plan's representative
contribution rate is the lowest
applicable contribution
rate of any eligible NHCE among a group
of eligible NHCEs that consists of half
of all
eligible NHCEs for the plan year (or, if
greater, the lowest applicable
contribution rate of
any eligible NHCE in the group of all
eligible NHCEs for the plan year and who
is
employed by the employer on the last day
of the plan year).
(C) Definition of applicable
contribution rate. For purposes of this
paragraph
(a)(6)(iv), the applicable contribution
rate for an eligible NHCE is the sum of
the qualified
matching contributions taken into
account under this paragraph (a)(6) for
the eligible
NHCE for the plan year and the qualified
nonelective contributions made for that
eligible
NHCE for the plan year, divided by that
eligible NHCE's compensation for the
same
period.
(v) Qualified matching contributions.
Qualified matching contributions satisfy
this
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(vi) Contributions only used once.
Qualified nonelective contributions and
qualified
matching contributions can not be taken
into account under this paragraph (a)(6)
to the
extent such contributions are taken into
account for purposes of satisfying any
other ADP
test, any ACP test, or the requirements
of §1.401(k)-3, 1.401(m)-3 or
1.401(k)-4. Thus, for
example, matching contributions that are
made pursuant to §1.401(k)-3(c) cannot
be taken
into account under the ADP test.
Similarly, if a plan switches from the
current year testing
method to the prior year testing method
pursuant to §1.401(k)-2(c), qualified
nonelective
contributions that are taken into
account under the current year testing
method for a year
may not be taken into account under the
prior year testing method for the next
year
(7) Examples. The following examples
illustrate the application of this
paragraph
(a):
Example 1. (i) Employer X has three
employees, A, B, and C. Employer X
sponsors a profit-sharing plan (Plan Z)
that includes a cash or deferred
arrangement.
Each year, Employer X determines a bonus
attributable to the prior year. Under
the cash
or deferred arrangement, each eligible
employee may elect to receive none, all
or any part
of the bonus in cash. X contributes the
remainder to Plan Z. The portion of the
bonus paid
in cash, if any, is paid 2 months after
the end of the plan year and thus is
included in
compensation for the following plan
year. Employee A is an HCE, while
Employees B and
C are NHCEs. The plan uses the current
year testing method and defines
compensation
to include elective contributions and
bonuses paid during each plan year. In
February of
2005, Employer X determined that no
bonuses will be paid for 2004. In
February of 2006,
Employer X provided a bonus for each
employee equal to 10% of regular
compensation
for 2005. For the 2005 plan year, A, B,
and C have the following compensation
and make
the following elections:
-106
-106Compensation
Elective Contribution
A $100,000 $4,340
B 60,000 2,860
C 45,000 1,250
(ii) For each employee, the ratio of
elective contributions to the employee’s
compensation for the plan year is:
Employee Ratio of Elective Contribution
to Compensation ADR
A $4,340/$100,000 4.34%
B 2,860/60,000 4.77
C 1,250/45,000 2.78
(iii) The ADP for the HCEs (Employee A)
is 4.34%. The ADP for the NHCEs is
3.78% ((4.77% + 2.78%)/2). Because 4.34%
is less than 4.73% (3.78% multiplied by
1.25), the plan satisfies the ADP test
under paragraph (a)(1)(i) of this
section.
Example 2. (i) The facts are the same as
in Example 1, except that elective
contributions are made pursuant to a
salary reduction agreement throughout
the plan year,
and no bonuses are paid. As provided by
section 414(s)(2), Employer X includes
elective
contributions in compensation. During
the year, B and C defer the same amount
as in
Example 1, but A defers $5,770. Thus,
the compensation and elective
contributions for A,
B, and C are:
Employee Gross Compensation Elective
Contributions ADR
A $ 100,000 $ 5,770 5.77%
B 60,000 2,860 4.77
C 45,000 1,250 2.78
(ii) The ADP for the HCEs (Employee A)
is 5.77 %. The ADP for the NHCEs is
3.78% ((4.77% + 2.78%)/2). Because 5.77%
exceeds 4.73% (3.78% x 1.25), the plan
does not satisfy the ADP test under
paragraph (a)(1)(i) of this section.
However, because
the ADP for the HCEs does not exceed the
ADP for the NHCEs by more than 2
percentage points and the ADP for the
HCEs does not exceed the ADP for the
NHCEs
multiplied by 2 (3.78% x 2 = 7.56%), the
plan satisfies the ADP test under
paragraph
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Example 3. (i) Employees D through L are
eligible employees in Plan T, a
profit-sharing plan that contains a cash
or deferred arrangement. The plan is a
calendar
year plan that uses the prior year
testing method. Plan T provides that
elective
contributions are included in
compensation (as provided under section
414(s)(2)). Each
eligible employee may elect to defer up
to 6% of compensation under the cash or
deferred
arrangement. Employees D and E are HCEs.
The compensation, elective
contributions,
and ADRs of Employees D and E for the
2006 plan year are shown below:
Employee Compensation for
2006 Plan Year
Elective Contributions
for 2006 Plan Year
ADR for 2006 Plan Year
D $100,000 $10,000 10%
E $95,000 $4,750 5%
(ii) During the 2005 plan year,
Employees F through L were eligible
NHCEs. The
compensation, elective contributions and
ADRs of Employees F through L for the
2005
plan year are shown in the following
table:
Employee Compensation for
2005 Plan Year
Elective Contributions
for 2005 Plan Year
ADR for 2005 Plan Year
F $60,000 $3,600 6%
G $40,000 $1,600 4%
H $30,000 $1,200 4%
I $20,000 $ 600 3%
J $20,000 $600 3%
K $10,000 $300 3%
L $5,000 $150 3%
(iii) The ADP for 2006 for the HCEs is
7.5%. Because Plan T is using the prior
year testing method, the applicable year
for determining the NHCE ADP is the
prior plan
year (i.e., 2005). The NHCE ADP is
determined using the ADRs for NHCEs
eligible
during the prior plan year (without
regard to whether they are eligible
under the plan during
the plan year). The ADP for the NHCEs is
3.71% (the sum of the individual ADRs,
26%,
divided by 7 employees). Because 7.5%
exceeds 4.64% (3.71% x 1.25), Plan T
does not
satisfy the ADP test under paragraph
(a)(1)(i) of this section. In addition,
because the ADP
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Example 4. (i) Plan U is a calendar year
profit-sharing plan that contains a cash
or
deferred arrangement and uses the
current year testing method. Plan U
provides that
elective contributions are included in
compensation (as provided under section
414(s)(2)).
The following amounts are contributed
under Plan U for the 2006 plan year: (A)
QNECs
equal to 2% of each employee’s
compensation; (B) Contributions equal to
6% of each
employee’s compensation that are not
immediately vested under the terms of
the plan; (C)
3% of each employee’s compensation that
the employee may elect to receive as
cash or
to defer under the plan. Both types of
nonelective contributions are made for
the HCEs
(employees M and N) and the NHCEs
(employees O through S) for the plan
year and are
contributed after the end of the plan
year and before the end of the following
plan year. In
addition, neither type of nonelective
contributions is used for any other ADP
or ACP test.
(ii) For the 2006 plan year, the
compensation, elective contributions,
and actual
deferral ratios of employees M through S
are shown in the following table:
Employee Compensation Elective
Contributions Actual Deferral Ratio
M $100,000 $3,000 3%
N $100,000 $2,000 2%
O $ 60,000 $1,800 3%
P $40,000 0 0
Q $30,000 0 0
R $5,000 0 0
S $20,000 0 0
(iii) The elective contributions alone
do not satisfy the ADP test of section
401(k)(3)
and paragraph (a)(1) of this section
because the ADP for the HCEs, consisting
of
employees M and N, is 2.5% and the ADP
for the NHCEs is 0.6%.
(iv) The 2% QNECs satisfies the timing
requirement of paragraph (a)(6)(i) of
this
section because it is paid within
12-month after the plan year for which
allocated. All
nonelective contributions also satisfy
the requirements relating to section
401(a)(4) set
forth in paragraph (a)(6)(ii) of this
section (because all employees receive
an 8%
nonelective contribution and the
nonelective contributions excluding the
QNECs is 6% for
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-109
(v) Because the rules of paragraph
(a)(6) of this section are satisfied,
the 2%
QNECs may be taken into account in
applying the ADP test of section
401(k)(3) and
paragraph (a)(1) of this section. The 6%
nonelective contributions, however, may
not be
taken into account because they are not
QNECs.
(vi) If the 2% QNECs are taken into
account, the ADP for the HCEs is 4.5%,
and the
actual deferral percentage for the NHCEs
is 2.6%. Because 4.5% is not more than
two
percentage points greater than 2.6
percent, and not more than two times
2.6, the cash or
deferred arrangement satisfies the ADP
test of section 401(k)(3) under
paragraph
(a)(1)(ii) of this section.
Example 5. (i) The facts are the same as
Example 4, except the plan uses the
prior
year testing method. In addition, the
NHCE ADP for the 2005 plan year (the
prior plan
year) is 0.8% and no QNECs are
contributed for the 2005 plan year
during 2005 or 2006.
(ii) In 2007, it is determined that the
elective contributions alone do not
satisfy the
ADP test of section 401(k)(3) and
paragraph (a)(1) of this section for
2006 because the
2006 ADP for the eligible HCEs,
consisting of employees M and N, is 2.5%
and the 2005
ADP for the eligible NHCEs is 0.8%. An
additional QNEC of 2% of compensation is
made for each eligible NHCE in 2007 and
allocated for 2005.
(iii) The 2% QNECs that are made in 2007
and allocated for the 2005 plan year do
not satisfy the timing requirement of
paragraph (a)(6)(i) of this section for
the applicable
year for the 2005 plan year because they
were not contributed before the last day
of the
2006 plan year. Accordingly, the 2%
QNECs do not satisfy the rules of
paragraph (a)(6) of
this section and may not be taken into
account in applying the ADP test of
section
401(k)(3) and paragraph (a)(1) of this
section for the 2006 plan year. The cash
or deferred
arrangement fails to be a qualified cash
or deferred arrangement unless the ADP
failure is
corrected under paragraph (b) of this
section.
Example 6. (i) The facts are the same as
Example 4, except that the ADP for the
HCEs is 4.6% and there is no 6%
nonelective contribution under the plan.
The employer
would like to take into account the 2%
QNEC in determining the ADP for the
NHCEs but
not in determining the ADP for the HCEs.
(ii) The elective contributions alone
fail the requirements of section 401(k)
and
paragraph (a)(1) of this section because
the HCE ADP for the plan year (4.6%)
exceeds
0.75% (0.6% x 1.25) and 1.2% (0.6% x 2).
-110
-110The
2% QNECs may not be taken into account
in determining the ADP of the
NHCEs because they fail to satisfy the
requirements relating to section
401(a)(4) set forth
in paragraph (a)(6)(ii) of this section.
This is because the amount of
nonelective
contributions, excluding those QNECs
that would be taken into account under
the ADP
test, would be 2% of compensation for
the HCEs and 0% for the NHCEs.
Therefore, the
cash or deferred arrangement fails to be
a qualified cash or deferred arrangement
unless
the ADP failure is corrected under
paragraph (b) of this section.
Example 7. (i) The facts are the same as
Example 6, except that Employee R
receives a QNEC in an amount of $500 and
no QNECs are made on behalf of the other
employees.
(ii) If the QNEC could be taken into
account under paragraph (a)(6) of this
section,
the ADP for the NHCEs would be 2.6% and
the plan would satisfy the ADP test. The
QNEC is disproportionate under paragraph
(a)(6)(iv) of this section, and cannot
be taken
into account under paragraph (a)(6) of
this section, to the extent it exceeds
the greater of
5% and two times the plan’s
representative contribution rate (0%),
multiplied by Employee
R’s compensation. The plan’s
representative contribution rate is 0%
because it is the
lowest applicable contribution rate
among a group of NHCEs that is at least
half of all
NHCEs, or all the NHCEs who are employed
on the last day of the plan year.
Therefore,
the QNEC may be taken into account under
the ADP test only to the extent it does
not
exceed 5% times Employee R’s
compensation (or $250) and the cash or
deferred
arrangement fails to satisfy the ADP
test and must correct under paragraph
(b) of this
section.
Example 8. (i) The facts are the same as
in Example 4 except that the plan
changes from the current year testing
method to the prior year testing method
for the
following plan year (2006 plan year).
The ADP for the HCEs for the 2006 plan
year is
3.5%.
(ii) The 2% QNECs may not be taken into
account in determining the ADP for the
NHCEs for the applicable year (2005 plan
year) in satisfying the ADP test for the
2006
plan year because they were taken into
account in satisfying the ADP test for
the 2005
plan year. Accordingly, the NHCE ADP for
the applicable year is 0.6%. The
elective
contributions for the plan year fail the
requirements of section 401(k) and
paragraph (a)(1)
of this section because the HCE ADP for
the plan year (3.5%) exceeds the ADP
limit of
1.2% (the greater of 0.75% (0.6% x 1.25)
and 1.2% (0.6% x 2)), determined using
the
applicable year ADP for the NHCEs.
Therefore, the cash or deferred
arrangement fails to
be a qualified cash or deferred
arrangement unless the ADP failure is
corrected under
paragraph (b) of this section.
Example 9. (i)(A) Employer N maintains
Plan X, a profit sharing plan that
contains
a cash or deferred arrangement and that
uses the current year testing method.
Plan X
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Elective
Contributions
Total Matching
Contributions
Matching
contributions
that are not
QMACs
QMACs
Highly compensated
employees
15% 5% 5% 0%
(B) The elective contributions and
matching contributions with respect to
the
NHCEs for the 2005 plan year are shown
in the following table:
Elective
Contributions
Total Matching
Contributions
Matching
contributions
that are not
QMACs
QMACs
Nonhighly compensated
employees
11% 4% 0% 4%
(ii) The plan fails to satisfy the ADP
test of section 401(k)(3)(A) and
paragraph
(a)(1) of this section because the ADP
for HCEs (15%) is more than 125% of the
ADP for
NHCEs (11%), and more than 2 percentage
points greater than 11%. However, the
plan
provides that QMACs may be used to meet
the requirements of section
401(k)(3)(A)(ii)
provided that they are not used for any
other ADP or ACP test. QMACs equal to 1%
of
compensation are taken into account for
each NHCE in applying the ADP test.
After this
adjustment, the applicable ADP and ACP
(taking into account the provisions of
§1.401(m)2(
a)(5)(ii)) for the plan year are as
follows:
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Contribution
Percentage
HCEs 15% 5%
Nonhighly compensated
employees
12 3
(iii) The elective contributions and
QMACs taken into account for purposes of
the
ADP test of section 401(k)(3) satisfy
the requirements of section
401(k)(3)(A)(ii) under
paragraph (a)(1)(ii) of this section
because the ADP for HCEs (15%) is not
more than the
ADP for NHCEs multiplied by 1.25 (12% x
1.25 = 15%).
(b) Correction of excess
contributions--(1) Permissible
correction methods--(i) In
general. A cash or deferred arrangement
does not fail to satisfy the
requirements of
section 401(k)(3) and paragraph (a)(1)
of this section if the employer, in
accordance with
the terms of the plan that includes the
cash or deferred arrangement, uses any
of the
following correction methods-(
A) Qualified nonelective contributions
or qualified matching contributions. The
employer makes qualified nonelective
contributions or qualified matching
contributions that
are taken into account under this
section and, in combination with other
amounts taken into
account under paragraph (a) of this
section, allow the cash or deferred
arrangement to
satisfy the requirements of paragraph
(a)(1) of this section.
(B) Excess contributions distributed.
Excess contributions are distributed in
accordance with paragraph (b)(2) of this
section.
(C) Excess contributions
recharacterized. Excess contributions
are
recharacterized in accordance with
paragraph (b)(3) of this section.
(ii) Combination of correction methods.
A plan may provide for the use of any of
the
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(iii) Exclusive means of correction. A
failure to satisfy the requirements of
paragraph (a)(1) of this section may not
be corrected using any method other than
the
ones described in paragraphs (b)(1)(i)
and (ii) of this section. Thus, excess
contributions
for a plan year may not remain
unallocated or be allocated to a
suspense account for
allocation to one or more employees in
any future year. In addition, excess
contributions
may not be corrected using the
retroactive correction rules of
§1.401(a)(4)-11(g). See
§1.401(a)(4)-11(g)(3)(vii) and (5).
(2) Corrections through
distribution--(i) General rule. This
paragraph (b)(2) contains
the rules for correction of excess
contributions through a distribution
from the plan.
Correction through a distribution
generally involves a 4 step process.
First, the plan must
determine, in accordance with paragraph
(b)(2)(ii) of this section, the total
amount of
excess contributions that must be
distributed under the plan. Second, the
plan must
apportion the total amount of excess
contributions among HCEs in accordance
with
paragraph (b)(2)(iii) of this section.
Third, the plan must determine the
income allocable to
excess contributions in accordance with
paragraph (b)(2)(iv) of this section.
Finally, the
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(ii) Calculation of total amount to be
distributed. The following procedures
must be
used to determine the total amount of
the excess contributions to be
distributed-(
A) Calculate the dollar amount of excess
contributions for each HCE. The amount
of excess contributions attributable to
a given HCE for a plan year is the
amount (if any) by
which the HCE’s contributions taken into
account under this section must be
reduced for
the HCE’s ADR to equal the highest
permitted ADR under the plan. To
calculate the
highest permitted ADR under a plan, the
ADR of the HCE with the highest ADR is
reduced
by the amount required to cause that
HCE’s ADR to equal the ADR of the HCE
with the
next highest ADR. If a lesser reduction
would enable the arrangement to satisfy
the
requirements of paragraph (b)(2)(ii)(C)
of this section, only this lesser
reduction is used in
determining the highest permitted ADR.
(B) Determination of the total amount of
excess contributions. The process
described in paragraph (b)(2)(ii)(A) of
this section must be repeated until the
arrangement
would satisfy the requirements of
paragraph (b)(2)(ii)(C) of this section.
The sum of all
reductions for all HCEs determined under
paragraph (b)(2)(ii)(A) of this section
is the total
amount of excess contributions for the
plan year.
(C) Satisfaction of ADP. A cash or
deferred arrangement satisfies this
paragraph
(b)(2)(ii)(C) if the arrangement would
satisfy the requirements of paragraph
(a)(1)(ii) of this
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(iii) Apportionment of total amount of
excess contributions among the HCEs. The
following procedures must be used in
apportioning the total amount of excess
contributions
determined under paragraph (b)(2)(ii) of
this section among the HCEs:
(A) Calculate the dollar amount of
excess contributions for each HCE. The
contributions of the HCE with the
highest dollar amount of contributions
taken into account
under this section are reduced by the
amount required to cause that HCE’s
contributions to
equal the dollar amount of the
contributions taken into account under
this section for the
HCE with the next highest dollar amount
of contributions taken account under
this section.
If a lesser apportionment to the HCE
would enable the plan to apportion the
total amount of
excess contributions, only the lesser
apportionment would apply.
(B) Limit on amount apportioned to any
individual. For purposes of this
paragraph
(b)(2)(iii), the amount of contributions
taken into account under this section
with respect to
an HCE who is an eligible employee in
more than one plan of an employer is
determined
by taking into account all contributions
otherwise taken into account with
respect to such
HCE under any plan of the employer
during the plan year of the plan being
tested as being
made under the plan being tested.
However, the amount of excess
contributions
apportioned for a plan year with respect
to any HCE must not exceed the amount of
contributions actually contributed to
the plan for the HCE for the plan year.
Thus, in the
case of an HCE who is an eligible
employee in more than one plan of the
same employer
to which elective contributions are made
and whose ADR is calculated in
accordance with
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(C) Apportionment to additional HCEs.
The procedure in paragraph
(b)(2)(iii)(A) of
this section must be repeated until the
total amount of excess contributions
determined
under paragraph (b)(2)(ii) of this
section have been apportioned.
(iv) Income allocable to excess
contributions--(A) General rule. The
income
allocable to excess contributions is
equal to the sum of the allocable gain
or loss for the
plan year and, to the extent the excess
contributions are or will be credited
with allocable
gain or loss for the period after the
close of the plan year (gap period), the
allocable gain
or loss for the gap period.
(B) Method of allocating income. A plan
may use any reasonable method for
computing the income allocable to excess
contributions, provided that the method
does
not violate section 401(a)(4), is used
consistently for all participants and
for all corrective
distributions under the plan for the
plan year, and is used by the plan for
allocating income
to participant’s accounts. See
§1.401(a)(4)-1(c)(8).
(C) Alternative method of allocating
plan year income. A plan may allocate
income
to excess contributions for the plan
year by multiplying the income for the
plan year
allocable to the elective contributions
and other amounts taken account under
this section
(including contributions made for the
plan year), by a fraction, the numerator
of which is the
excess contributions for the employee
for the plan year, and the denominator
of which is
the account balance attributable to
elective contributions and other
contributions taken into
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(D) Safe harbor method of allocating gap
period income. A plan may use the safe
harbor method in this paragraph
(b)(2)(iv)(D) to determine income on
excess contributions
for the gap period. Under this safe
harbor method, income on excess
contributions for the
gap period is equal to 10% of the income
allocable to excess contributions for
the plan
year that would be determined under
paragraph (b)(2)(iv)(C) of this section,
multiplied by
the number of calendar months that have
elapsed since the end of the plan year.
For
purposes of calculating the number of
calendar months that have elapsed under
the safe
harbor method, a corrective distribution
that is made on or before the fifteenth
day of a
month is treated as made on the last day
of the preceding month and a
distribution made
after the fifteenth day of a month is
treated as made on the last day of the
month.
(E) Alternative method for allocating
plan year and gap period income. A plan
may
determine the allocable gain or loss for
the aggregate of the plan year and the
gap period
by applying the alternative method
provided by paragraph (b)(2)(iv)(C) of
this section to
this aggregate period. This is
accomplished by substituting the income
for the plan year
and the gap period for the income for
the plan year and by substituting the
contributions
taken into account under this section
for the plan year and the gap period for
the
contributions taken account under this
section for the plan year in determining
the fraction
that is multiplied by that income.
(v) Distribution. Within 12 months after
the close of the plan year in which the
excess contribution arose, the plan must
distribute to each HCE the excess
contributions
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(vi) Tax treatment of corrective
distributions--(A) General rule. Except
as provided in
paragraph (b)(2)(vi)(B) of this section,
a corrective distribution of excess
contributions (and
income) that is made within 2½ months
after the end of the plan year for which
the excess
contributions were made is includible in
the employee’s gross income on the
earliest date
any elective contributions by the
employee during the plan year would have
been received
by the employee had the employee
originally elected to receive the
amounts in cash. A
corrective distribution of excess
contributions (and income) that is made
more than 2½
months after the end of the plan year
for which the contributions were made is
includible in
the employee’s gross income in the
employee’s taxable year in which
distributed.
Regardless of when the corrective
distribution is made, it is not subject
to the early
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(B) Rule for de minimis distributions.
If the total amount of excess
contributions,
determined under this paragraph (b)(2),
and excess aggregate contributions
determined
under §1.401(m)-2(b)(2) distributed to a
recipient under a plan for any plan year
is less
than $100 (excluding income), a
corrective distribution of excess
contributions (and
income) is includible in the gross
income of the recipient in the taxable
year of the recipient
in which the corrective distribution is
made.
(vii) Other rules--(A) No employee or
spousal consent required. A corrective
distribution of excess contributions
(and income) may be made under the terms
of the plan
without regard to any notice or consent
otherwise required under sections
411(a)(11) and
417.
(B) Treatment of corrective
distributions as elective contributions.
Excess
contributions are treated as employer
contributions for purposes of sections
404 and 415
even if distributed from the plan.
(C) No reduction of required minimum
distribution. A distribution of excess
contributions (and income) is not
treated as a distribution for purposes
of determining
whether the plan satisfies the minimum
distribution requirements of section
401(a)(9). See
§1.401(a)(9)-5, Q&A-9(b).
(D) Partial distributions. Any
distribution of less than the entire
amount of excess
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distribution of excess contributions and
allocable income.
(viii) Examples. The following examples
illustrate the application of this
paragraph
(b)(2). For purposes of these examples,
none of the plans provide for catch-up
contributions under section 414(v). The
examples are as follows:
Example 1. (i) Plan P, a calendar year
profit-sharing plan that includes a cash
or
deferred arrangement, provides for
distribution of excess contributions to
HCEs to the
extent necessary to satisfy the ADP
test. Employee A, an HCE, has elective
contributions
of $12,000 and $200,000 in compensation,
for an ADR of 6%, and Employee B, a
second
HCE, has elective contributions of
$8,960 and compensation of $128,000, for
an ADR of
7%. The ADP for the NHCEs is 3%. Under
the ADP test, the ADP of the two HCEs
under
the plan may not exceed 5% (i.e., 2
percentage points more than the ADP of
the NHCEs
under the plan). The ADP for the 2 HCEs
under the plan is 6.5%. Therefore, there
must
be a correction of excess contributions.
(ii) The total amount of excess
contributions for the HCEs is determined
under
paragraph (b)(2)(ii) of this section as
follows: the elective contributions of
Employee B (the
HCE with the highest ADR) are reduced by
$1,280 in order to reduce his ADR to 6%
($7,680/$128,000), which is the ADR of
Employee A.
(iii) Because the ADP of the HCEs
determined after the $1,280 reduction to
Employee B still exceeds 5%, further
reductions in elective contributions are
necessary in
order to reduce the ADP of the HCEs to
5%. The elective contributions of
Employee A
and Employee B are each reduced by 1% of
compensation ($2,000 and $1,280
respectively). Because the ADP of the
HCEs determined after the reductions
equals 5%,
the plan would satisfy the requirements
of (a)(1)(ii) of this section.
(iv) The total amount of excess
contributions ($4,560 =
$1,280+$2,000+$1,280) is
apportioned among the HCEs under
paragraph (b)(2)(iii) of this section
first to the HCE
with the highest amount of elective
contributions. Therefore, Employee A is
apportioned
$3,040 (the amount required to cause
Employee A’s elective contributions to
equal the
next highest dollar amount of elective
contributions).
(v) Because the total amount of excess
contributions has not been apportioned,
further apportionment is necessary. The
balance ($1,520) of the total amount of
excess
contributions is apportioned equally
among Employee A and Employee B ($760 to
each).
(vi) Therefore, the cash or deferred
arrangement will satisfy the
requirements of
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Example 2. (i) The facts are the same as
in Example 1, except Employee A’s ADR
is based on $3,000 of elective
contributions to this plan and $9,000 of
elective
contributions to another plan of the
employer.
(ii) The total amount of excess
contributions ($4,560 =
$1,280+$2,000+$1,280) is
apportioned among the HCEs under
paragraph (b)(2)(iii) of this section
first to the HCE
with the highest amount of elective
contributions. The amount of elective
contributions for
Employee A is $12,000. Therefore,
Employee A is apportioned $3,040 (the
amount
required to cause Employee A's elective
contributions to equal the next highest
dollar
amount of elective contributions).
However, pursuant to paragraph
(b)(2)(iii)(B) of this
section, no more than the amount
actually contributed to the plan may be
apportioned to an
HCE. Accordingly, no more than $3,000
may be apportioned to Employee A.
Therefore,
the remaining $1,560 must be apportioned
to Employee B.
(ii) The cash or deferred arrangement
will satisfy the requirements of
paragraph
(a)(1) of this section if, by the end of
the 12 month period following the end of
the 2006 plan
year, Employee A receives a corrective
distribution of excess contributions
equal to
$3,000 (total amount of elective
contributions actually contributed to
the plan for Employee
A) and allocable income and Employee B
receives a corrective distribution of
$1,560 and
allocable income.
Example 3. (i) The facts are the same as
in Example 1. The plan allocates income
on a daily basis. The corrective
distributions are made in February 2007.
The excess
contribution that must be distributed to
Employee A as a corrective distribution
is $3,800.
This amount must be increased (or
decreased) to reflect gains (or losses)
allocable to that
amount during the 2006 plan year. The
plan uses a reasonable method that
satisfies
paragraph (b)(2)(iv)(B) of this section
to determine the gain during the 2006
plan year
allocable to the $3,800 as $145.
Therefore, as of the end of the 2006
plan year, the
amount of corrective distribution that
is required would be $3,945.
(ii) Because the plan allocates income
on a daily basis, excess contributions
are
credited with gain or loss during the
gap period. Therefore, the corrective
distribution must
include income allocable to $3,945
through the date of distribution. For
the period from
January 1 through the date of
distribution, the income allocable to
$3,945 is $105.
Therefore, the plan will satisfy the
requirements of paragraph (a)(1) of this
section if
Employee A receives a corrective
distribution of $4,050.
Example 4. (i) The facts are the same as
in Example 1. The plan determines plan
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(ii) Therefore, the plan year income
allocable to the $3,800 corrective
distribution
for Employee A is $266.65 ($8,000
multiplied by $3,800 divided by
$110,000). Therefore,
as of the end of the 2006 plan year, the
amount of corrective distribution that
is required is
$4,066.65. This amount must be increased
by the gap period income of $53.32 (10%
multiplied by $266.65 (2006 plan year
income attributable to the excess
contribution)
multiplied by 2 (number of calendar
months since end of 2006 plan year).
Therefore, the
plan will satisfy the requirements of
paragraph (a)(1) of this section if
Employee A receives
a corrective distribution of $4,119.97.
Example 5. (i) The facts are the same as
in Example 4, except that the plan
provides for quarterly valuations based
on the account balance at the end of the
quarter.
(ii) Because the plan’s method for
allocating income does not allocate any
income
to amounts distributed during the
quarter, Employee A will not be credited
with an
allocation of income with respect to the
amount distributed. Accordingly, Plan P
need not
plan adjust the distribution of excess
contribution for income during the gap
period and
thus satisfies paragraph (a)(1) of this
section if Employee A receives a
corrective
distribution of $4,066.65.
(3) Recharacterization of excess
contributions--(i) General rule. Excess
contributions are recharacterized in
accordance with this paragraph (b)(3)
only if the
excess contributions that would have to
be distributed under (b)(2) of this
section if the plan
was correcting through distribution of
excess contributions are recharacterized
as
described in paragraph (b)(3)(ii) of
this section, and all of the conditions
set forth in
paragraph (b)(3)(iii) of this section
are satisfied.
(ii) Treatment of recharacterized excess
contributions. Recharacterized excess
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(iii) Additional rules--(A) Time of
recharacterization. Excess contributions
may not
be recharacterized under this paragraph
(b)(3) after 2½ months after the close
of the plan
year to which the recharacterization
relates. Recharacterization is deemed to
have
occurred on the date on which the last
of those HCEs with excess contributions
to be
recharacterized is notified in
accordance with paragraph (b)(3)(ii) of
this section.
(B) Employee contributions must be
permitted under plan. The amount of
recharacterized excess contributions, in
combination with the employee
contributions
actually made by the HCE, may not exceed
the maximum amount of employee
contributions (determined without regard
to the ACP test of section 401(m)(2))
permitted
under the provisions of the plan as in
effect on the first day of the plan
year.
(C) Treatment of recharacterized excess
contributions. Recharacterized excess
contributions continue to be treated as
employer contributions for all other
purposes under
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(4) Rules applicable to all
corrections--(i) Coordination with
distribution of excess
deferrals--(A) Treatment of excess
deferrals that reduce excess
contributions. The amount
of excess contributions (and allocable
income) to be distributed under
paragraph (b)(2) of
this section or the amount of excess
contributions recharacterized under
paragraph (b)(3)
of this section with respect to an
employee for a plan year, is reduced by
any amounts
previously distributed to the employee
from the plan to correct excess
deferrals for the
employee’s taxable year ending with or
within the plan year in accordance with
section
402(g)(2).
(B) Treatment of excess contributions
that reduce excess deferrals. Under
§1.402(g)-1(e), the amount required to
be distributed to correct an excess
deferral to an
employee for a taxable year is reduced
by any excess contributions (and
allocable
income) previously distributed or excess
contributions recharacterized with
respect to the
employee for the plan year beginning
with or within the taxable year. The
amount of excess
contributions includible in the gross
income of the employee, and the amount
of excess
contributions reported by the payer or
plan administrator as includible in the
gross income
of the employee, does not include the
amount of any reduction under
§1.402(g)-1(e)(6).
(ii) Forfeiture of match on distributed
excess contributions. A matching
contribution
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(iii) Permitted forfeiture of QMAC.
Pursuant to section 401(k)(8)(E), a
qualified
matching contribution is not treated as
forfeitable under §1.401(k)-1(c) merely
because
under the plan it is forfeited in
accordance with paragraph (b)(4)(ii) of
this section.
(iv) No requirement for recalculation.
If excess contributions are distributed
or
recharacterized in accordance with
paragraphs (b)(2) and (3) of this
section, the cash or
deferred arrangement is treated as
meeting the nondiscrimination test of
section 401(k)(3)
regardless of whether the ADP for the
HCEs, if recalculated after the
distributions or
recharacterizations, would satisfy
section 401(k)(3).
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of excess contributions that are
catch-up contributions. A cash or
deferred arrangement does not fail to
meet the requirements of section
401(k)(3) and
paragraph (a)(1) of this section merely
because excess contributions that are
catch-up
contributions because they exceed the
ADP limit, as described in
§1.414(v)-1(b)(1)(iii),
are not corrected in accordance with
this paragraph (b).
(5) Failure to timely correct--(i)
Failure to correct within 2½ months
after end of plan
year. If a plan does not correct excess
contributions within 2½ months after the
close of the
plan year for which the excess
contributions are made, the employer
will be liable for a
10% excise tax on the amount of the
excess contributions. See section 4979
and
§54.4979-1 of this chapter. Qualified
nonelective contributions and qualified
matching
contributions properly taken into
account under paragraph (a)(6) of this
section for a plan
year may enable a plan to avoid having
excess contributions, even if the
contributions are
made after the close of the 2½ month
period.
(ii) Failure to correct within 12 months
after end of plan year. If excess
contributions
are not corrected within 12 months after
the close of the plan year for which
they were
made, the cash or deferred arrangement
will fail to satisfy the requirements of
section
401(k)(3) for the plan year for which
the excess contributions are made and
all subsequent
plan years during which the excess
contributions remain in the trust.
(c) Additional rules for prior year
testing method--(1) Rules for change in
testing
method--(i) General rule. A plan is
permitted to change from the prior year
testing method
to the current year testing method for
any plan year. A plan is permitted to
change from the
current year testing method to the prior
year testing method only in situations
described in
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(ii) Situations permitting a change to
the prior year testing method. The
situations
described in this paragraph (c)(1)(ii)
are:
(A) The plan is not the result of the
aggregation of two or more plans, and
the
current year testing method was used
under the plan for each of the 5 plan
years preceding
the plan year of the change (or if
lesser, the number of plan years the
plan has been in
existence, including years in which the
plan was a portion of another plan).
(B) The plan is the result of the
aggregation of two or more plans, and
for each of
the plans that are being aggregated (the
aggregating plans), the current year
testing
method was used for each of the 5 plan
years preceding the plan year of the
change (or if
lesser, the number of plan years since
that aggregating plan has been in
existence,
including years in which the aggregating
plan was a portion of another plan).
(C) A transaction described in section
410(b)(6)(C)(i) and §1.410(b)-2(f)
occurs
and-(
1) As a result of the transaction, the
employer maintains both a plan using the
prior
year testing method and a plan using the
current year testing method; and
(2) The change from the current year
testing method to the prior year testing
method
occurs within the transition period
described in section 410(b)(6)(C)(ii).
(2) Calculation of ADP under the prior
year testing method for the first plan
year--(i)
Plans that are not successor plans. If,
for the first plan year of any plan
(other than a
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(ii) First plan year defined. For
purposes of this paragraph (c)(2), the
first plan year
of any plan is the first year in which
the plan provides for elective
contributions. Thus, the
rules of this paragraph (c)(2) do not
apply to a plan (within the meaning of
§1.410(b)-7(b))
for a plan year if for such plan year
the plan is aggregated under
§1.401(k)-1(b)(4) with any
other plan that provides for elective
contributions in the prior year.
(iii) Successor plans. A plan is a
successor plan if 50% or more of the
eligible
employees for the first plan year were
eligible employees under a qualified
cash or
deferred arrangement maintained by the
employer in the prior year. If a plan
that is a
successor plan uses the prior year
testing method for its first plan year,
the ADP for the
group of NHCEs for the applicable year
must be determined under paragraph
(c)(4) of this
section.
(3) Plans using different testing
methods for the ADP and ACP test. Except
as
otherwise provided in this paragraph
(c)(3), a plan may use the current year
testing method
or prior year testing method for the ADP
test for a plan year without regard to
whether the
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(i) The recharacterization method of
paragraph (b)(3) of this section to
correct
excess contributions for a plan year;
(ii) The rules of §1.401(m)-2(a)(6)(ii)
to take elective contributions into
account
under the ACP test (rather than the ADP
test); or
(iii) The rules of paragraph (a)(6)(v)
of this section to take qualified
matching
contributions into account under the ADP
test (rather than the ACP test).
(4) Rules for plan coverage changes--(i)
In general. A plan that uses the prior
year
testing method and experiences a plan
coverage change during a plan year
satisfies the
requirements of this section for that
year only if the plan provides that the
ADP for the
NHCEs for the plan year is the weighted
average of the ADPs for the prior year
subgroups.
(ii) Optional rule for minor plan
coverage changes. If a plan coverage
change
occurs and 90% or more of the total
number of the NHCEs from all prior year
subgroups
are from a single prior year subgroup,
then, in lieu of using the weighted
averages
described in paragraph (c)(4)(i) of this
section, the plan may provide that the
ADP for the
group of eligible NHCEs for the prior
year under the plan is the ADP of the
NHCEs for the
prior year of the plan under which that
single prior year subgroup was eligible.
(iii) Definitions. The following
definitions apply for purposes of this
paragraph
(c)(4):
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coverage change. The term plan coverage
change means a change in the
group or groups of eligible employees
under a plan on account of-(
1) The establishment or amendment of a
plan;
(2) A plan merger or spinoff under
section 414(l);
(3) A change in the way plans (within
the meaning of §1.410(b)-7(b)) are
combined
or separated for purposes of
§1.401(k)-1(b)(4) (e.g., permissively
aggregating plans not
previously aggregated under
§1.410(b)-7(d), or ceasing to
permissively aggregate plans
under §1.410(b)-7(d));
(4) A reclassification of a substantial
group of employees that has the same
effect
as amending the plan (e.g., a transfer
of a substantial group of employees from
one
division to another division); or
(5) A combination of any of paragraphs
(c)(4)(iii)(A)(1) through (4) of this
section.
(B) Prior year subgroup. The term prior
year subgroup means all NHCEs for the
prior plan year who, in the prior year,
were eligible employees under a specific
plan
maintained by the employer that included
a qualified cash or deferred arrangement
and
who would have been eligible employees
in the prior year under the plan being
tested if the
plan coverage change had first been
effective as of the first day of the
prior plan year
instead of first being effective during
the plan year. The determination of
whether an
NHCE is a member of a prior year
subgroup is made without regard to
whether the NHCE
terminated employment during the prior
year.
(C) Weighted average of the ADPs for the
prior year subgroups. The term
weighted average of the ADPs for the
prior year subgroups means the sum, for
all prior
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respect to a prior year subgroup means
the ADP for the prior plan year of the
specific plan
under which the members of the prior
year subgroup were eligible employees on
the first
day of the prior plan year, multiplied
by a fraction, the numerator of which is
the number of
NHCEs in the prior year subgroup and
denominator of which is the total number
of NHCEs
in all prior year subgroups.
(iv) Examples. The following examples
illustrate the application of this
paragraph
(c)(4):
Example 1. (i) Employer B maintains two
calendar year plans, Plan O and Plan P,
each of which includes a cash or
deferred arrangement. The plans were not
permissively
aggregated under §1.410(b)-7(d) for the
2005 plan year. Both plans use the prior
year
testing method. Plan O had 300 eligible
employees who were NHCEs for the 2005
plan
year, and their ADP for that year was
6%. Sixty of the eligible employees who
were
NHCEs for the 2005 plan year under Plan
O, terminated their employment during
that year.
Plan P had 100 eligible employees who
were NHCEs for 2005, and the ADP for
those
NHCEs for that plan was 4%. Plan O and
Plan P are permissively aggregated under
§1.410(b)-7(d) for the 2006 plan year.
(ii) The permissive aggregation of Plan
O and Plan P for the 2006 plan year
under
§ 1.410(b)-7(d) is a plan coverage
change that results in treating the
plans as one plan
(Plan OP) for purposes of
§1.401(k)-1(b)(4). Therefore, the prior
year ADP for the NHCEs
under Plan OP for the 2006 plan year is
the weighted average of the ADPs for the
prior
year subgroups: the Plan O prior year
subgroup and the Plan P prior year
subgroup.
(iii) The Plan O prior year subgroup
consists of the 300 employees who, in
the 2005
plan year, were eligible NHCEs under
Plan O and who would have been eligible
under
Plan OP for the 2005 plan year if Plan O
and Plan P had been permissively
aggregated for
that plan year. The Plan P prior year
subgroup consists of the 100 employees
who, in the
2005 plan year, were eligible NHCEs
under Plan P and would have been
eligible under
Plan OP for the 2005 plan year if Plan O
and Plan P had been permissively
aggregated for
that plan year.
(iv) The weighted average of the ADPs
for the prior year subgroups is the sum
of
the adjusted ADP for the Plan O prior
year subgroup and the adjusted ADP for
the Plan P
prior year subgroup. The adjusted ADP
for the Plan O prior year subgroup is
4.5%,
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(v) As provided in paragraph
(c)(4)(iii)(B) of this section, the
determination of
whether an NHCE is a member of a prior
year subgroup is made without regard to
whether
that NHCE terminated employed during the
prior year. Thus, the prior ADP for the
NHCEs
under Plan OP for the 2006 plan year is
unaffected by the termination of the 60
NHCEs
covered by Plan O during the 2005 plan
year.
Example 2. (i) The facts are the same as
Example 1, except that the 60 employees
who terminated employment during the
2005 plan are instead spun-off to
another plan.
(ii) The permissive aggregation of Plan
O and Plan P for the 2006 plan year
under
§1.410(b)-7(d) is a plan coverage change
that results in treating the plans as
one plan
(Plan OP) for purposes of
§1.401(k)-1(b)(4) and the spin-off of
the 60 employees is a plan
coverage change. Therefore, the prior
year ADP for the NHCEs under Plan OP for
the
2006 plan year is the weighted average
of the ADPs for the prior year
subgroups: the Plan
O prior year subgroup and the Plan P
prior year subgroup.
(iii) For purposes of determining the
prior year subgroups, the employees who
would have been eligible employees in
the prior year under the plan being
tested are
determined as if both plan coverage
changes had first been effective as of
the first day of
the prior plan year. The Plan O prior
year subgroup consists of the 240
employees who, in
the 2005 plan year, were eligible NHCEs
under Plan O and would have been
eligible
under Plan OP for the 2005 plan year if
the spin-off had occurred at the
beginning of the
2005 plan year and Plan O and Plan P had
been permissively aggregated under
§1.410(b)-7(d) for that plan year. The
Plan P prior year subgroup consists of
the 100
employees who, in the 2005 plan year,
were eligible NHCEs under Plan P and
would have
been eligible under Plan OP for the 2005
plan year if Plan O and Plan P had been
permissively aggregated under
§1.410(b)-7(d) for that plan year.
(iv) The weighted average of the ADPs
for the prior year subgroups is the sum
of
the adjusted ADP with respect to the
prior year subgroup consisting of
eligible NHCEs
from Plan O and the adjusted ADP with
respect to the prior year subgroup
consisting of
eligible NHCEs from Plan P. The adjusted
ADP for the prior year subgroup
consisting of
eligible NHCEs under Plan O is 4.23%,
calculated as follows: 6% (the ADP for
the NHCEs
under Plan O for the 2005 plan year) x
240/340 (the number of NHCEs in that
prior year
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Example 3. (i) The facts are the same as
in Example 1, except that instead of
Plan
O and Plan P being permissively
aggregated for the 2006 plan year, 200
of the employees
eligible under Plan O were spun-off from
Plan O and merged into Plan P.
(ii) The spin-off from Plan O and merger
to Plan P for the 2006 plan year are
plan
coverage changes for Plan P. Therefore,
the prior year ADP for the NHCEs under
Plan P
for the 2006 plan year is the weighted
average of the ADPs for the prior year
subgroups
under Plan P. There are 2 subgroups
under Plan P for the 2006 plan year. The
Plan O
prior year subgroup consists of the 200
employees who, in the 2005 plan year,
were
eligible NHCEs under Plan O and who
would have been eligible under Plan P
for the 2005
plan year if the spin-off and merger had
occurred on the first day of the 2005
plan year.
The Plan P prior year subgroup consists
of the 100 employees who, in the 2005
plan year,
were eligible NHCEs under Plan P for the
2005 plan year.
(iii) The weighted average of the ADPs
for the prior year subgroups is the sum
of
the adjusted ADP for the Plan O prior
year subgroup and the adjusted ADP for
the Plan P
prior year subgroup. The adjusted ADP
for the Plan O prior year subgroup is
4.0%,
calculated as follows: 6% (the ADP for
the NHCEs under Plan O for the 2005 plan
year) x
200/300 (the number of NHCEs in the Plan
O prior year subgroup divided by the
total
number of NHCEs in all prior year
subgroups). The adjusted ADP for the
Plan P prior year
subgroup is 1.33%, calculated as
follows: 4% (the ADP for the NHCEs under
Plan P for
the 2005 plan year) x 100/300 (the
number of NHCEs in the Plan P prior year
subgroup
divided by the total number of NHCEs in
all prior year subgroups). Thus, the
prior year
ADP for NHCEs under Plan P for the 2006
plan year is 5.33% (the sum of adjusted
ADPs
for the 2 prior year subgroups, 4.0%
plus 1.33%).
(iv) The spin-off from Plan O for the
2006 plan year is a plan coverage change
for
Plan O. Therefore, the prior year ADP
for the NHCEs under Plan O for the 2006
plan year
is the weighted average of the ADPs for
the prior year subgroups under Plan O.
In this
case, there is only one prior year
subgroup under Plan O, the employees who
were
NHCEs of Employer B for the 2005 plan
year and who were eligible for the 2005
plan year
under Plan O. Because there is only one
prior year subgroup under Plan O, the
weighted
average of the ADPs for the prior year
subgroup under Plan O is equal to the
NHCE ADP
for the prior year (2005 plan year)
under Plan O, or 6%.
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(i) Employer C maintains a calendar year
plan, Plan Q, which includes a
cash or deferred arrangement that uses
the prior year testing method. Plan Q
covers
employees of Division A and Division B.
In 2005, Plan Q had 500 eligible
employees who
were NHCEs, and the ADP for those NHCEs
for 2005 was 2%. Effective January 1,
2006,
Employer C amends the eligibility
provisions under Plan Q to exclude
employees of
Division B effective January 1, 2006. In
addition, effective on that same date,
Employer C
establishes a new calendar year plan,
Plan R, which includes a cash or
deferred
arrangement that uses the prior year
testing method. The only eligible
employees under
Plan R are the 100 employees of Division
B who were eligible employees under Plan
Q.
(ii) Plan R is a successor plan, within
the meaning of paragraph (c)(2)(iii) of
this
section (because all of the employees
were eligible employees under Plan Q in
the prior
year). Therefore, Plan R cannot use the
first plan year rule set forth in
paragraph (c)(2)(i) of
this section.
(iii) The amendment to the eligibility
provisions of Plan Q and the
establishment of
Plan R are plan coverage changes within
the meaning of paragraph (c)(4)(iii)(A)
of this
section for Plan Q and Plan R.
Accordingly, each plan must determine
the NHCE ADP for
the 2006 plan year under the rules set
forth in paragraph (c)(4) of this
section.
(iv) The prior year ADP for NHCEs under
Plan Q is the weighted average of the
ADPs for the prior year subgroups. Plan
Q has only one prior year subgroup
(because the
only NHCEs who would have been eligible
employees under Plan Q for the 2005 plan
year
if the amendment to the Plan Q
eligibility provisions had occurred as
of the first day of that
plan year were eligible employees under
Plan Q). Therefore, for purposes of the
2006 plan
year under Plan Q, the ADP for NHCEs for
the prior year is the weighted average
of the
ADPs for the prior year subgroups, or
2%, the same as if the plan amendment
had not
occurred.
(v) Similarly, Plan R has only one prior
year subgroup (because the only NHCEs
who would have been eligible employees
under Plan R for the 2005 plan year if
the plan
were established as of the first day of
that plan year were eligible employees
under Plan
Q). Therefore, for purposes of the 2006
testing year under Plan R, the ADP for
NHCEs for
the prior year is the weighted average
of the ADPs for the prior year
subgroups, or 2%, the
same as that of Plan Q.
Example 5. (i) The facts are the same as
in Example 4, except that the provisions
of Plan R extend eligibility to 50
hourly employees who previously were not
eligible
employees under any qualified cash or
deferred arrangement maintained by
Employer C.
(ii) Plan R is a successor plan (because
100 of Plan R’s 150 eligible employees
were eligible employees under another
qualified cash or deferred arrangement
maintained
by Employer C in the prior year).
Therefore, Plan R cannot use the first
plan year rule set
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(iii) The establishment of Plan R is a
plan coverage change that affects Plan
R.
Because the 50 hourly employees were not
eligible employees under any qualified
cash or
deferred arrangement of Employer C for
the prior plan year, they do not
comprise a prior
year subgroup. Accordingly, Plan R still
has only one prior year subgroup.
Therefore, for
purposes of the 2006 testing year under
Plan R, the ADP for NHCEs for the prior
year is
the weighted average of the ADPs for the
prior year subgroups, or 2%, the same as
that of
Plan Q.
§1.401(k)-3 Safe harbor requirements.
(a) ADP test safe harbor. A cash or
deferred arrangement satisfies the ADP
safe
harbor provision of section 401(k)(12)
for a plan year if the arrangement
satisfies the safe
harbor contribution requirement of
paragraph (b) or (c) of this section for
the plan year, the
notice requirement of paragraph (d) of
this section, the plan year requirements
of
paragraph (e) of this section, and the
additional rules of paragraphs (f), (g)
and (h) of this
section, as applicable. Pursuant to
section 401(k)(12)(E)(ii), the safe
harbor contribution
requirement of paragraph (b) or (c) of
this section must be satisfied without
regard to
section 401(l). The contributions made
under paragraphs (b) and (c) of this
section are
referred to as safe harbor nonelective
contributions and safe harbor matching
contributions, respectively.
(b) Safe harbor nonelective contribution
requirement--(1) General rule. The safe
harbor nonelective contribution
requirement of this paragraph is
satisfied if, under the
terms of the plan, the employer is
required to make a qualified nonelective
contribution on
behalf of each eligible NHCE equal to at
least 3% of the employee’s safe harbor
compensation.
(2) Safe harbor compensation defined.
For purposes of this section, safe
harbor
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(c) Safe harbor matching contribution
requirement--(1) In general. The safe
harbor
matching contribution requirement of
this paragraph (c) is satisfied if,
under the plan,
qualified matching contributions are
made on behalf of each eligible NHCE in
an amount
determined under the basic matching
formula of section 401(k)(12)(B)(i)(I),
as described in
paragraph (c)(2) of this section, or
under an enhanced matching formula of
section
401(k)(12)(B)(i)(II), as described in
paragraph (c)(3) of this section.
(2) Basic matching formula. Under the
basic matching formula, each eligible
NHCE
receives qualified matching
contributions in an amount equal to the
sum of-(
i) 100% of the amount of the employee’s
elective contributions that do not
exceed
3% of the employee’s safe harbor
compensation; and
(ii) 50% of the amount of the employee’s
elective contributions that exceed 3% of
the employee’s safe harbor compensation
but that do not exceed 5% of the
employee’s
safe harbor compensation.
(3) Enhanced matching formula. Under an
enhanced matching formula, each
eligible NHCE receives a matching
contribution under a formula that, at
any rate of elective
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(4) Limitation on HCE matching
contributions. The safe harbor matching
contribution requirement of this
paragraph (c) is not satisfied if the
ratio of matching
contributions made on account of an
HCE’s elective contributions under the
cash or
deferred arrangement for a plan year to
those elective contributions is greater
than the
ratio of matching contributions to
elective contributions that would apply
with respect to any
eligible NHCE with elective
contributions at the same percentage of
safe harbor
compensation.
(5) Use of safe harbor match not
precluded by certain plan
provisions--(i) Safe
harbor matching contributions on
employee contributions. The safe harbor
matching
contribution requirement of this
paragraph (c) will not fail to be
satisfied merely because
safe harbor matching contributions are
made on both elective contributions and
employee
contributions if safe harbor matching
contributions are made with respect to
the sum of
elective contributions and employee
contributions on the same terms as safe
harbor
matching contributions are made with
respect to elective contributions.
Alternatively, the
safe harbor matching contribution
requirement of this paragraph (c) will
not fail to be
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(ii) Periodic matching contributions.
The safe harbor matching contribution
requirement of this paragraph (c) will
not fail to be satisfied merely because
the plan
provides that safe harbor matching
contributions will be made separately
with respect to
each payroll period (or with respect to
all payroll periods ending with or
within each month
or quarter of a plan year) taken into
account under the plan for the plan
year, provided that
safe harbor matching contributions with
respect to any elective contributions
made during
a plan year quarter are contributed to
the plan by the last day of the
immediately following
plan year quarter.
(6) Permissible restrictions on elective
contributions by NHCEs--(i) General
rule.
The safe harbor matching contribution
requirement of this paragraph (c) is not
satisfied if
elective contributions by NHCEs are
restricted, unless the restrictions are
permitted by this
paragraph (c)(6).
(ii) Restrictions on election periods. A
plan may limit the frequency and
duration of
periods in which eligible employees may
make or change cash or deferred
elections under
a plan. However, an employee must have a
reasonable opportunity (including a
reasonable period after receipt of the
notice described in paragraph (d) of
this section) to
make or change a cash or deferred
election for the plan year. For purposes
of this
paragraph (c)(6)(ii), a 30-day period is
deemed to be a reasonable period to make
or
change a cash or deferred election.
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-139Restrictions
on amount of elective contributions. A
plan is permitted to limit the
amount of elective contributions that
may be made by an eligible employee
under a plan,
provided that each NHCE who is an
eligible employee is permitted (unless
the employee
is restricted under paragraph (c)(6)(v)
of this section) to make elective
contributions in an
amount that is at least sufficient to
receive the maximum amount of matching
contributions
available under the plan for the plan
year, and the employee is permitted to
elect any
lesser amount of elective contributions.
However, a plan may require eligible
employees
to make cash or deferred elections in
whole percentages of compensation or
whole dollar
amounts.
(iv) Restrictions on types of
compensation that may be deferred. A
plan may limit
the types of compensation that may be
deferred by an eligible employee under a
plan,
provided that each eligible NHCE is
permitted to make elective contributions
under a
definition of compensation that would be
a reasonable definition of compensation
within
the meaning of §1.414(s)-1(d)(2). Thus,
the definition of compensation from
which elective
contributions may be made is not
required to satisfy the
nondiscrimination requirement of
§1.414(s)-1(d)(3).
(v) Restrictions due to limitations
under the Internal Revenue Code. A plan
may limit
the amount of elective contributions
made by an eligible employee under a
plan-(
A) Because of the limitations of section
402(g) or section 415; or
(B) Because, on account of a hardship
distribution, an employee’s ability to
make
elective contributions has been
suspended for 6 months in accordance
with
§1.401(k)-1(d)(3)(iv)(E).
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-140Examples.
The following examples illustrate the
safe harbor contribution
requirement of this paragraph (c):
Example 1. (i) Beginning January 1,
2006, Employer A maintains Plan L
covering
employees (including HCEs and NHCEs) in
Divisions D and E. Plan L contains a
cash or
deferred arrangement and provides
qualified matching contributions equal
to 100% of
each eligible employee’s elective
contributions up to 3% of compensation
and 50% of the
next 2% of compensation. For purposes of
the matching contribution formula, safe
harbor
compensation is defined as all
compensation within the meaning of
section 415(c)(3) (a
definition that satisfies section
414(s)). Also, each employee is
permitted to make elective
contributions from all safe harbor
compensation within the meaning of
section 415(c)(3)
and may change a cash or deferred
election at any time. Plan L limits the
amount of an
employee’s elective contributions for
purposes of section 402(g) and section
415, and, in
the case of a hardship distribution,
suspends an employee’s ability to make
elective
contributions for 6 months in accordance
with §1.401(k)-1(d)(3)(iv)(E). All
contributions
under Plan L are nonforfeitable and are
subject to the withdrawal restrictions
of section
401(k)(2)(B). Plan L provides for no
other contributions and Employer A
maintains no
other plans. Plan L is maintained on a
calendar-year basis and all
contributions for a plan
year are made within 12 months after the
end of the plan year.
(ii) Based on these facts, matching
contributions under Plan L are safe
harbor
matching contributions because they are
qualified matching contributions equal
to the
basic matching formula. Accordingly,
Plan L satisfies the safe harbor
contribution
requirement of this paragraph (c).
Example 2. (i) The facts are the same as
in Example 1, except that instead of
providing a basic matching contribution,
Plan L provides a qualified matching
contribution
equal to 100% of each eligible
employee’s elective contributions up to
4% of safe harbor
compensation.
(ii) Plan L’s formula is an enhanced
matching formula because each eligible
NHCE
receives safe harbor matching
contributions at a rate that, at any
rate of elective
contributions, provides an aggregate
amount of qualified matching
contributions at least
equal to the aggregate amount of
qualified matching contributions that
would have been
received under the basic safe harbor
matching formula, and the rate of
matching
contributions does not increase as the
rate of an employee’s elective
contributions
increases. Accordingly, Plan L satisfies
the safe harbor contribution requirement
of this
paragraph (c).
Example 3. (i) The facts are the same as
in Example 1, except that instead of
permitting each employee to make
elective contributions from all
compensation within the
meaning of section 415(c)(3), each
employee’s elective contributions under
Plan L are
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(ii) The definition of basic
compensation under Plan L is a
reasonable definition of
compensation within the meaning of
§1.414(s)-1(d)(2).
(iii) Plan L will not fail to satisfy
the safe harbor contribution requirement
of this
paragraph (c) merely because Plan L
limits the amount of elective
contributions and the
types of compensation that may be
deferred by eligible employees, provided
that each
eligible NHCE may make elective
contributions equal to at least 4% of
the employee’s
safe harbor compensation.
Example 4. (i) The facts are the same as
in Example 1, except that Plan L
provides that only employees employed on
the last day of the plan year will
receive a safe
harbor matching contribution.
(ii) Even if the plan that provides for
employee contributions and matching
contributions satisfies the minimum
coverage requirements of section
410(b)(1) taking into
account this last-day requirement, Plan
L would not satisfy the safe harbor
contribution
requirement of this paragraph (c)
because safe harbor matching
contributions are not
made on behalf of all eligible NHCEs who
make elective contributions.
(iii) The result would be the same if,
instead of providing safe harbor
matching
contributions under an enhanced formula,
Plan L provides for a 3% safe harbor
nonelective
contribution that is restricted to
eligible employees under the cash or
deferred
arrangement who are employed on the last
day of the plan year.
Example 5. (i) The facts are the same as
in Example 1, except that instead of
providing qualified matching
contributions under the basic matching
formula to employees
in both Divisions D and E, employees in
Division E are provided qualified
matching
contributions under the basic matching
formula, while safe harbor matching
contributions
continue to be provided to employees in
Division D under the enhanced matching
formula
described in Example 2.
(ii) Even if Plan L satisfies
§1.401(a)(4)-4 with respect to each rate
of matching
contributions available to employees
under the plan, the plan would fail to
satisfy the safe
harbor contribution requirement of this
paragraph (c) because the rate of
matching
contributions with respect to HCEs in
Division D at a rate of elective
contributions between
3% and 5% would be greater than that
with respect to NHCEs in Division E at
the same
rate of elective contributions. For
example, an HCE in Division D who would
have a 4%
rate of elective contributions would
have a rate of matching contributions of
100% while an
NHCE in Division E who would have the
same rate of elective contributions
would have a
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(d) Notice requirement--(1) General
rule. The notice requirement of this
paragraph
(d) is satisfied for a plan year if each
eligible employee is given written
notice of the
employee’s rights and obligations under
the plan and the notice satisfies the
content
requirement of paragraph (d)(2) of this
section and the timing requirement of
paragraph
(d)(3) of this section.
(2) Content requirement--(i) General
rule. The content requirement of this
paragraph (d)(2) is satisfied if the
notice is-(
A) Sufficiently accurate and
comprehensive to inform the employee of
the
employee’s rights and obligations under
the plan; and
(B) Written in a manner calculated to be
understood by the average employee
eligible to participate in the plan.
(ii) Minimum content requirement.
Subject to the requirements of paragraph
(d)(2)(iii) of this section, a notice is
not considered sufficiently accurate and
comprehensive unless the notice
accurately describes--
(A) The safe harbor matching
contribution or safe harbor nonelective
contribution
formula used under the plan (including a
description of the levels of safe harbor
matching
contributions, if any, available under
the plan);
(B) Any other contributions under the
plan or matching contributions to
another plan
on account of elective contributions or
employee contributions under the plan
(including the
potential for discretionary matching
contributions) and the conditions under
which such
contributions are made;
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plan to which safe harbor contributions
will be made (if different than the
plan containing the cash or deferred
arrangement);
(D) The type and amount of compensation
that may be deferred under the plan;
(E) How to make cash or deferred
elections, including any administrative
requirements that apply to such
elections;
(F) The periods available under the plan
for making cash or deferred elections;
(G) Withdrawal and vesting provisions
applicable to contributions under the
plan;
and
(H) Information that makes it easy to
obtain additional information about the
plan
(including an additional copy of the
summary plan description) such as
telephone numbers,
addresses and, if applicable, electronic
addresses, of individuals or offices
from whom
employees can obtain such plan
information.
(iii) References to SPD. A plan will not
fail to satisfy the content requirements
of
this paragraph (d)(2) merely because, in
the case of information described in
paragraph
(d)(2)(ii)(B) of this section (relating
to any other contributions under the
plan), paragraph
(d)(2)(ii)(C) of this section (relating
to the plan to which safe harbor
contributions will be
made) or paragraph (d)(2)(ii)(D) of this
section (relating to the type and amount
of
compensation that may be deferred under
the plan), the notice cross-references
the
relevant portions of a summary plan
description that provides the same
information that
would be provided in accordance with
such paragraphs and that has been
provided (or is
concurrently provided) to employees.
(3) Timing requirement--(i) General
rule. The timing requirement of this
paragraph
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(ii) Deemed satisfaction of timing
requirement. The timing requirement of
this
paragraph (d)(3) is deemed to be
satisfied if at least 30 days (and no
more than 90 days)
before the beginning of each plan year,
the notice is given to each eligible
employee for
the plan year. In the case of an
employee who does not receive the notice
within the
period described in the previous
sentence because the employee becomes
eligible after
the 90th day before the beginning of the
plan year, the timing requirement is
deemed to be
satisfied if the notice is provided no
more than 90 days before the employee
becomes
eligible (and no later than the date the
employee becomes eligible). Thus, for
example, the
preceding sentence would apply in the
case of any employee eligible for the
first plan year
under a newly established plan that
provides for elective contributions, or
would apply in
the case of the first plan year in which
an employee becomes eligible under an
existing
plan that provides for elective
contributions.
(e) Plan year requirement--(1) General
rule. Except as provided in this
paragraph
(e) or in paragraph (f) of this section,
a plan will fail to satisfy the
requirements of section
401(k)(12) and this section unless plan
provisions that satisfy the rules of
this section are
adopted before the first day of the plan
year and remain in effect for an entire
12-month
plan year. Moreover, if, as described
under paragraph (g)(4) of this section,
safe harbor
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(2) Initial plan year. A newly
established plan (other than a successor
plan within the
meaning of §1.401(k)-2(c)(2)(iii)) will
not be treated as violating the
requirements of this
paragraph (e) merely because the plan
year is less than 12 months, provided
that the plan
year is at least 3 months long (or, in
the case of a newly established employer
that
establishes the plan as soon as
administratively feasible after the
employer comes into
existence, a shorter period). Similarly,
a cash or deferred arrangement will not
fail to
satisfy the requirement of this
paragraph (e) if it is added to an
existing profit sharing,
stock bonus, or pre-ERISA money purchase
pension plan for the first time during
that year
provided that-(
i) The plan is not a successor plan; and
(ii) The cash or deferred arrangement is
made effective no later than 3 months
prior
to the end of the plan year.
(3) Change of plan year. A plan that has
a short plan year as a result of
changing its
plan year will not fail to satisfy the
requirements of paragraph (e)(1) of this
section merely
because the plan year has less than 12
months, provided that-(
i) The plan satisfied the requirements
of this section for the immediately
preceding
plan year; and
(ii) The plan satisfies the requirements
of this section for the immediately
following
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(4) Final plan year. A plan that
terminates during a plan year will not
fail to satisfy
the requirements of paragraph (e)(1) of
this section merely because the final
plan year is
less than 12 months, provided that-(
i) The plan would satisfy the
requirements of paragraph (g) of this
section, treating
the termination of the plan as a
reduction or suspension of safe harbor
matching
contributions, other than the
requirement that employees have a
reasonable opportunity to
change their cash or deferred elections
and, if applicable, employee
contribution elections;
or
(ii) The plan termination is in
connection with a transaction described
in section
410(b)(6)(C) or the employer incurs a
substantial business hardship comparable
to a
substantial business hardship described
in section 412(d).
(f) Plan amendments adopting safe harbor
nonelective contributions--(1) General
rule. Notwithstanding paragraph (e)(1)
of this section, a plan that provides
for the use of
the current year testing method may be
amended after the first day of the plan
year and no
later than 30 days before the last day
of the plan year to adopt the safe
harbor method of
this section using nonelective
contributions under paragraph (b) of
this section, but only if
the plan provides the contingent and
follow-up notices described in this
section. A plan
amendment made pursuant to this
paragraph (f)(1) for a plan year may
provide for the use
of the safe harbor method described in
this section solely for that plan year
and a plan
sponsor is not limited in the number of
years for which it is permitted to adopt
an
amendment providing for the safe harbor
method of this section using nonelective
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(2) Contingent notice provided. A plan
satisfies the requirement to provide the
contingent notice under this paragraph
(f)(2) if it provides a notice that
would satisfy the
requirements of paragraph (d) of this
section, except that, in lieu of setting
forth the safe
harbor contributions used under the plan
as set forth in paragraph (d)(2)(ii)(A)
of this
section, the notice specifies that the
plan may be amended during the plan year
to include
the safe harbor nonelective contribution
and that, if the plan is amended, a
follow-up notice
will be provided.
(3) Follow-up notice requirement. A plan
satisfies the requirement to provide a
follow-up notice under this paragraph
(f)(3) if, no later than 30 days before
the last day of
the plan year, each eligible employee is
given a notice that states that the safe
harbor
nonelective contributions will be made
for the plan year. This notice is
permitted to be
combined with a contingent notice
provided under paragraph (f)(2) of this
section for the
next plan year.
(g) Permissible reduction or suspension
of safe harbor matching
contributions–(1)
General rule. A plan that provides for
safe harbor matching contributions will
not fail to
satisfy the requirements of section
401(k)(3) for a plan year merely because
the plan is
amended during a plan year to reduce or
suspend safe harbor matching
contributions on
future elective contributions (and, if
applicable, employee contributions)
provided that--
(i) All eligible employees are provided
the supplemental notice in accordance
with
paragraph (g)(2) of this section;
(ii) The reduction or suspension of safe
harbor matching contributions is
effective
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(iii) Eligible employees are given a
reasonable opportunity (including a
reasonable
period after receipt of the supplemental
notice) prior to the reduction or
suspension of safe
harbor matching contributions to change
their cash or deferred elections and, if
applicable,
their employee contribution elections;
(iv) The plan 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 described in
§1.401(k)-2(a)(2)(ii); and
(v) The plan satisfies the requirements
of this section (other than this
paragraph (g))
with respect to amounts deferred through
the effective date of the amendment.
(2) Notice of suspension requirement.
The notice of suspension requirement of
this
paragraph (g)(2) is satisfied if each
eligible employee is given a written
notice that
explains--
(i) The consequences of the amendment
which reduces or suspends matching
contributions on future elective
contributions and, if applicable,
employee contributions;
(ii) The procedures for changing their
cash or deferred election and, if
applicable,
their employee contribution elections;
and
(iii) The effective date of the
amendment.
(h) Additional rules--(1) Contributions
taken into account. A contribution is
taken
into account for purposes of this
section for a plan year if and only if
the contribution would
be taken into account for such plan year
under the rules of §1.401(k)-2(a) or
1.401(m)-2(a).
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must be taken into account for such plan
year for purposes of this section, even
if the compensation would have been
received after
the close of the plan year.
(2) Use of safe harbor nonelective
contributions to satisfy other
nondiscrimination
tests. A safe harbor nonelective
contribution used to satisfy the
nonelective contribution
requirement under paragraph (b) of this
section may also be taken into account
for
purposes of determining whether a plan
satisfies section 401(a)(4). Thus, these
contributions are not subject to the
limitations on qualified nonelective
contributions under
§1.401(k)-2(a)(6)(ii), but are subject
to the rules generally applicable to
nonelective
contributions under section 401(a)(4).
See §1.401(a)(4)-1(b)(2)(ii). However,
pursuant to
section 401(k)(12)(E)(ii), to the extent
they are needed to satisfy the safe
harbor
contribution requirement of paragraph
(b) of this section, safe harbor
nonelective
contributions may not be taken into
account under any plan for purposes of
section 401(l)
(including the imputation of permitted
disparity under §1.401(a)(4)-7).
(3) Early participation rules. Section
401(k)(3)(F) and
§1.401(k)-2(a)(1)(iii)(A),
which provide an alternative
nondiscrimination rule for certain plans
that provide for early
participation, do not apply for purposes
of section 401(k)(12) and this section.
Thus, a
plan is not treated as satisfying this
section with respect to the eligible
employees who
have not completed the minimum age and
service requirements of section
410(a)(1)(A)
unless the plan satisfies the
requirements of this section with
respect to such eligible
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(4) Satisfying safe harbor contribution
requirement under another defined
contribution plan. Safe harbor matching
or nonelective contributions may be made
to the
plan that contains the cash or deferred
arrangement or to another defined
contribution plan
that satisfies section 401(a) or 403(a).
If safe harbor contributions are made to
another
defined contribution plan, the safe
harbor plan must specify the plan to
which the safe
harbors are made and contribution
requirement of paragraph (b) or (c) of
this section must
be satisfied in the other defined
contribution plan in the same manner as
if the
contributions were made to the plan that
contains the cash or deferred
arrangement.
Consequently, the plan to which the
contributions are made must have the
same plan year
as the plan containing the cash and
deferred arrangement and each employee
eligible
under the plan containing the cash or
deferred arrangement must be eligible
under the
same conditions under the other defined
contribution plan. The plan to which the
safe
harbor contributions are made need not
be a plan that can be aggregated with
the plan
that contains the cash or deferred
arrangement.
(5) Contributions used only once. Safe
harbor matching or nonelective
contributions cannot be used to satisfy
the requirements of this section with
respect to
more than one plan.
§1.401(k)-4 SIMPLE 401(k) plan
requirements.
(a) General rule. A cash or deferred
arrangement satisfies the SIMPLE 401(k)
plan
provision of section 401(k)(11) for a
plan year if the arrangement satisfies
the
requirements of paragraphs (b) through
(i) of this section for that year. A
plan that contains
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(b) Eligible employer--(1) General rule.
A SIMPLE 401(k) plan must be established
by an eligible employer. Eligible
employer for purposes of this section
means, with
respect to any plan year, an employer
that had no more than 100 employees who
received
at least $5,000 of SIMPLE compensation,
as defined in paragraph (e)(5) of this
section,
from the employer for the prior calendar
year.
(2) Special rule. An eligible employer
that establishes a SIMPLE 401(k) plan
for a
plan year and that fails to be an
eligible employer for any subsequent
plan year, is treated
as an eligible employer for the 2 plan
years following the last plan year the
employer was
an eligible employer. If the failure is
due to any acquisition, disposition, or
similar
transaction involving an eligible
employer, the preceding sentence applies
only if the
provisions of section 410(b)(6)(C)(i)
are satisfied.
(c) Exclusive plan--(1) General rule.
The SIMPLE 401(k) plan must be the
exclusive
plan for each SIMPLE 401(k) plan
participant for the plan year. This
requirement is
satisfied if there are no contributions
made, or benefits accrued, for services
during the
plan year on behalf of any SIMPLE 401(k)
plan participant under any other
qualified plan
maintained by the employer. Other
qualified plan for purposes of this
section means any
plan, contract, pension, or trust
described in section 219(g)(5)(A) or
(B).
(2) Special rule. A SIMPLE 401(k) plan
will not be treated as failing the
requirements of this paragraph (c)
merely because any SIMPLE 401(k) plan
participant
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(d) Election and notice--(1) General
rule. An eligible employer establishing
or
maintaining a SIMPLE 401(k) plan must
satisfy the election and notice
requirements in
paragraphs (d)(2) and (d)(3) of this
section.
(2) Employee elections--(i) Initial plan
year of participation. For the plan year
in
which an employee first becomes eligible
under the SIMPLE 401(k) plan, the
employee
must be permitted to make a cash or
deferred election under the plan during
a 60-day
period that includes either the day the
employee becomes eligible or the day
before.
(ii) Subsequent plan years. For each
subsequent plan year, each eligible
employee
must be permitted to make or modify his
cash or deferred election during the
60-day
period immediately preceding such plan
year.
(iii) Election to terminate. An eligible
employee must be permitted to terminate
his
cash or deferred election at any time.
If an employee does terminate his cash
or deferred
election, the plan is permitted to
provide that such employee cannot have
elective
contributions made under the plan for
the remainder of the plan year.
(3) Employee notices. The employer must
notify each eligible employee within a
reasonable time prior to each 60-day
election period, or on the day the
election period
starts, that he or she can make a cash
or deferred election, or modify a prior
election, if
applicable, during that period. The
notice must state whether the eligible
employer will
make the matching contributions
described in paragraph (e)(3) of this
section or the
nonelective contributions described in
paragraph (e)(4) of this section.
(e) Contributions--(1) General rule. A
SIMPLE 401(k) plan satisfies the
contribution
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(2) Elective contributions. Subject to
the limitations on annual additions
under
section 415, each eligible employee must
be permitted to make an election to have
up to
$10,000 of elective contributions made
on the employee's behalf under the
SIMPLE 401(k)
plan for a plan year. The $10,000 limit
is increased beginning in 2006 in the
same manner
as the $160,000 amount is adjusted under
section 415(d), except that pursuant to
section
408(p)(2)(E)(ii) the base period shall
be the calendar quarter beginning July
1, 2004 and
any increase which is not a multiple of
$500 is rounded to the next lower
multiple of $500.
(3) Matching contributions. Each plan
year, the eligible employer must
contribute a
matching contribution to the account of
each eligible employee on whose behalf
elective
contributions were made for the plan
year. The amount of the matching
contribution must
equal the lesser of the eligible
employee's elective contributions for
the plan year or 3% of
the eligible employee's SIMPLE
compensation for the entire plan year.
(4) Nonelective contributions. For any
plan year, in lieu of contributing
matching
contributions described in paragraph
(e)(3) of this section, an eligible
employer may, in
accordance with plan terms, contribute a
nonelective contribution to the account
of each
eligible employee in an amount equal to
2% of the eligible employee's SIMPLE
compensation for the entire plan year.
The eligible employer may limit the
nonelective
contributions to those eligible
employees who received at least $5,000
of SIMPLE
compensation from the employer for the
entire plan year.
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compensation. Except as otherwise
provided, the term SIMPLE
compensation for purposes of this
section means the sum of wages, tips,
and other
compensation from the eligible employer
subject to federal income tax
withholding (as
described in section 6051(a)(3)) and the
employee’s elective contributions made
under
any other plan, and if applicable,
elective deferrals under a section
408(p) SIMPLE IRA
plan, a section 408(k)(6) SARSEP, or a
plan or contract that satisfies the
requirements of
section 403(b), and compensation
deferred under a section 457 plan,
required to be
reported by the employer on Form W-2 (as
described in section 6051(a)(8)). For
self-
employed individuals, SIMPLE
compensation means net earnings from
self-employment
determined under section 1402(a) prior
to subtracting any contributions made
under the
SIMPLE 401(k) plan on behalf of the
individual.
(f) Vesting. All benefits attributable
to contributions described in paragraph
(e) of
this section must be nonforfeitable at
all times.
(g) Plan year. The plan year of a SIMPLE
401(k) plan must be the whole calendar
year. Thus, in general, a SIMPLE 401(k)
plan can be established only on January
1 and
can be terminated only on December 31.
However, in the case of an employer that
did not
previously maintain a SIMPLE 401(k)
plan, the establishment date can be as
late as
October 1 (or later in the case of an
employer that comes into existence after
October 1
and establishes the SIMPLE 401(k) plan
as soon as administratively feasible
after the
employer comes into existence).
(h) Other rules. A SIMPLE 401(k) plan is
not treated as a top-heavy plan under
section 416. See section 416(g)(4)(G).
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[Reserved].
§1.401(k)-6 Definitions.
Unless otherwise provided, the
definitions of this section govern for
purposes of
section 401(k) and the regulations
thereunder.
Actual contribution percentage (ACP)
test. Actual contribution percentage
test or
ACP test means the test described in
§1.401(m)-2(a)(1).
Actual deferral percentage (ADP). Actual
deferral percentage or ADP means the
ADP of the group of eligible employees
as defined in §1.401(k)-2(a)(2).
Actual deferral percentage (ADP) test.
Actual deferral percentage test or ADP
test
means the test described in
§1.401(k)-2(a)(1).
Actual deferral ratio (ADR). Actual
deferral ratio or ADR means the ADR of
an
eligible employee as defined in
§1.401(k)-2(a)(3).
Cash or deferred arrangement. Cash or
deferred arrangement is defined in
§1.401(k)-1(a)(2).
Cash or deferred election. Cash or
deferred election is defined in
§1.401(k)1(
a)(3).
Compensation. Compensation means
compensation as defined in section
414(s)
and §1.414(s)-1. The period used to
determine an employee’s compensation for
a plan
year must be either the plan year or the
calendar year ending within the plan
year.
Whichever period is selected must be
applied uniformly to determine the
compensation of
every eligible employee under the plan
for that plan year. A plan may, however,
limit the
period taken into account under either
method to that portion of the plan year
or calendar
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Current year testing method. Current
year testing method means the testing
method described in
§1.401(k)-2(a)(2)(ii) or
§1.401(m)-2(a)(2)(ii) under which the
applicable year is the current plan
year.
Elective contributions. Elective
contributions means employer
contributions made
to a plan pursuant to a cash or deferred
election under a cash or deferred
arrangement
(whether or not the arrangement is a
qualified cash or deferred arrangement
under
§1.401(k)-1(a)(4)).
Eligible employee--(1) General rule.
Eligible employee means an employee who
is
directly or indirectly eligible to make
a cash or deferred election under the
plan for all or a
portion of the plan year. For example,
if an employee must perform purely
ministerial or
mechanical acts (e.g., formal
application for participation or consent
to payroll withholding)
in order to be eligible to make a cash
or deferred election for a plan year,
the employee is
an eligible employee for the plan year
without regard to whether the employee
performs
the acts.
(2) Conditions on eligibility. An
employee who is unable to make a cash or
deferred election because the employee
has not contributed to another plan is
also an
eligible employee. By contrast, if an
employee must perform additional service
(e.g.,
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(3) Certain one-time elections. An
employee is not an eligible employee
merely
because the employee, upon commencing
employment with the employer or upon the
employee’s first becoming eligible to
make a cash or deferred election under
any
arrangement of the employer, is given
the one-time opportunity to elect, and
the employee
does in fact elect, not to be eligible
to make a cash or deferred election
under the plan or
any other plan maintained by the
employer (including plans not yet
established) for the
duration of the employee’s employment
with the employer. This rule applies in
addition to
the rules in §1.401(k)-1(a)(3)(v)
relating to the definition of a cash or
deferred election. In
no event is an election made after
December 23, 1994, treated as a one-time
irrevocable
election under this paragraph if the
election is made by an employee who
previously
became eligible under another plan
(whether or not terminated) of the
employer.
Eligible HCE. Eligible HCE means an
eligible employee who is an HCE.
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Eligible NHCE means an eligible employee
who is not an HCE.
Employee. Employee means an employee
within the meaning of §1.410(b)-9.
Employee stock ownership plan (ESOP).
Employee stock ownership plan or
ESOP means the portion of a plan that is
an ESOP within the meaning of
§1.410(b)-7(c)(2).
Employer. Employer means an employer
within the meaning of §1.410(b)-9.
Excess contributions. Excess
contributions means, with respect to a
plan year, the
amount of total excess contributions
apportioned to an HCE under
§1.401(k)-2(b)(2)(iii).
Excess deferrals. Excess deferrals means
excess deferrals as defined in
§1.402(g)-1(e)(3).
Highly compensated employee (HCE).
Highly compensated employee or HCE has
the meaning provided in section 414(q).
Matching contributions. Matching
contributions means matching
contributions as
defined in §1.401(m)-1(a)(2).
Nonelective contributions. Nonelective
contributions means employer
contributions
(other than matching contributions) with
respect to which the employee may not
elect to
have the contributions paid to the
employee in cash or other benefits
instead of being
contributed to the plan.
Non-employee stock ownership plan
(non-ESOP). Non-employee stock ownership
plan or non-ESOP means the portion of a
plan that is not an ESOP within the
meaning of
§1.410(b)-7(c)(2).
Non-highly compensated employee (NHCE).
Non-highly compensated employee
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means an employee who is not an HCE.
Plan. Plan is defined in
§1.401(k)-1(b)(4).
Pre-ERISA money purchase pension plan.
(1) Pre-ERISA money purchase
pension plan is a pension plan-
(i) That is a defined contribution plan
(as defined in section 414(i));
(ii) That was in existence on June 27,
1974, and as in effect on that date,
included a
salary reduction agreement; and
(iii) Under which neither the employee
contributions nor the employer
contributions,
including elective contributions, may
exceed the levels (as a percentage of
compensation)
provided for by the contribution formula
in effect on June 27, 1974.
(2) A plan was in existence on June 27,
1974, if it was a written plan adopted
on or
before that date, even if no funds had
yet been paid to the trust associated
with the plan.
Prior year testing method. Prior year
testing method means the testing method
under which the applicable year is the
prior plan year, as described in
§1.401(k)-2(a)(2)(ii)
or §1.401(m)-2(a)(2)(ii).
Qualified matching contributions
(QMACs). Qualified matching
contributions or
QMACs means matching contributions that,
except as provided otherwise in
§1.401(k)1(
c) and (d), satisfy the requirements of
§1.401(k)-1(c) and (d) as though the
contributions
were elective contributions, without
regard to whether the contributions are
actually taken
into account under the ADP test under
§1.401(k)-2(a)(6) or the ACP test under
§1.401(m)2(
a)(6). Thus, the matching contributions
must satisfy the vesting requirements of
§1.401(k)-1(c) and be subject to the
distribution requirements of
§1.401(k)-1(d) when they
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Qualified nonelective contributions
(QNECs). Qualified nonelective
contributions or
QNECs means employer contributions,
other than elective contributions or
matching
contributions, that, except as provided
otherwise in §1.401(k)-1(c) and (d),
satisfy the
requirements of §1.401(k)-1(c) and (d)
as though the contributions were
elective
contributions, without regard to whether
the contributions are actually taken
into account
under the ADP test under
§1.401(k)-2(a)(6) or the ACP test under
§1.401(m)-2(a)(6).
Thus, the nonelective contributions must
satisfy the vesting requirements of
§1.401(k)-1(c)
and be subject to the distribution
requirements of §1.401(k)-1(d) when they
are contributed
to the plan.
Rural cooperative plans. Rural
cooperative plan means a plan described
in section
401(k)(7).
Par. 3. Sections 1.401(m)-0 through
1.401(m)-2 are revised and sections
1.401(m)-3 through 1.401(m)-5 are added
to read as follows:
§1.401(m)-0 Table of contents.
This section contains first a list of
section headings and then a list of the
paragraphs
in each section in §§1.401(m)-1 through
1.401(m)-5.
LIST OF SECTIONS
§1.401(m)-1 Employee contributions and
matching contributions.
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§1.401(m)-3 Safe harbor requirements.
§1.401(m)-4 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(m)-5 Definitions.
LIST OF PARAGRAPHS
§1.401(m)-1 Employee contributions and
matching contributions.
(a) General nondiscrimination rules.
(1) Nondiscriminatory amount of
contributions.
(i) Exclusive means of amounts testing.
(ii) Testing benefits, rights and
features.
(2) Matching contributions.
(i) In general.
(ii) Employer contributions made on
account of an employee contribution or
elective
deferral.
(iii) Employer contributions not on
account of an employee contribution or
elective deferral.
(3) Employee contributions.
(i) In general.
(ii) Certain contributions not treated
as employee contributions.
(iii) Qualified cost-of-living
arrangements.
(b) Nondiscrimination requirements for
amount of contributions.
(1) Matching contributions and employee
contributions.
(2) Automatic satisfaction by certain
plans.
(3) Anti-abuse provisions.
(4) Aggregation and restructuring.
(i) In general.
(ii) Aggregation of employee
contributions and matching contributions
within a plan.
(iii) Aggregation of plans.
(A) In general.
(B) Arrangements with inconsistent ACP
testing methods.
(iv) Disaggregation of plans and
separate testing.
(A) In general.
(B) Restructuring prohibited.
(v) Certain disaggregation rules not
applicable.
(c) Additional requirements.
(1) Separate testing for employee
contributions and matching
contributions.
(2) Plan provision requirement.
(d) Effective date.
§1.401(m)-2 ACP test.
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contribution percentage (ACP) test.
(1) In general.
(i) ACP test formula.
(ii) HCEs as sole eligible employees.
(iii) Special rule for early
participation.
(2) Determination of ACP.
(i) General rule.
(ii) Determination of applicable year
under current year and prior year
testing method.
(3) Determination of ACR.
(i) General rule.
(ii) ACR of HCEs eligible under more
than one plan.
(A) General rule.
(B) Plans not permitted to be
aggregated.
(iii) Example.
(4) Employee contributions and matching
contributions taken into account under
the ACP
test.
(i) Employee contributions.
(ii) Recharacterized elective
contributions.
(iii) Matching contributions.
(5) Matching contributions not taken
into account under the ACP test.
(i) General rule.
(ii) Disproportionate matching
contributions.
(A) Matching contributions in excess of
100%.
(B) Representative matching rate.
(C) Definition of matching rate.
(iii) Qualified matching contributions
used to satisfy the ADP test.
(iv) Matching contributions taken into
account under safe harbor provisions.
(v) Treatment of forfeited matching
contributions.
(6) Qualified nonelective contributions
and elective contributions that may be
taken into
account under the ACP test.
(i) Timing of allocation.
(ii) Elective contributions taken into
account under the ACP test.
(iii) Requirement that amount satisfy
section 401(a)(4).
(iv) Aggregation must be permitted.
(v) Disproportionate contributions not
taken into account.
(A) General rule.
(B) Definition of representative
contribution rate.
(C) Definition of applicable
contribution rate.
(vi) Contribution only used once.
(7) Examples.
(b) Correction of excess aggregate
contributions.
(1) Permissible correction methods.
(i) In general.
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contributions.
(B) Excess aggregate contributions
distributed or forfeited.
(ii) Combination of correction methods.
(iii) Exclusive means of correction.
(2) Correction through distribution.
(i) General rule.
(ii) Calculation of total amount to be
distributed.
(A) Calculate the dollar amount of
excess aggregate contributions for each
HCE.
(B) Determination of the total amount of
excess aggregate contributions.
(C) Satisfaction of ACP.
(iii) Apportionment of total amount of
excess aggregate contributions among the
HCEs.
(A) Calculate the dollar amount of
excess aggregate contributions for each
HCE.
(B) Limit on amount apportioned to any
HCE.
(C) Apportionment to additional HCEs.
(iv) Income allocable to excess
aggregate contributions.
(A) General rule.
(B) Method of allocating income.
(C) Alternative method of allocating
income for the plan year.
(D) Safe harbor method of allocating gap
period income.
(E) Alternative method of allocating
plan year and gap period income.
(F) Allocable income for recharacterized
elective contributions.
(v) Distribution and forfeiture.
(vi) Tax treatment of corrective
distributions.
(A) General rule.
(B) Rule for de minimis distributions.
(3) Other rules.
(i) No employee or spousal consent
required.
(ii) Treatment of corrective
distributions and forfeited
contributions as employer
contributions.
(iii) No reduction of required minimum
distribution.
(iv) Partial correction.
(v) Matching contributions on excess
contributions, excess deferrals and
excess
aggregate contributions.
(A) Corrective distributions not
permitted.
(B) Coordination with section 401(a)(4).
(vi) No requirement for recalculation.
(4) Failure to timely correct.
(i) Failure to correct within 2½ months
after end of plan year.
(ii) Failure to correct within 12 months
after end of plan year.
(5) Examples.
(c) Additional rules for prior year
testing method.
(1) Rules for change in testing method.
(2) Calculation of ACP under the prior
year testing method for the first plan
year.
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that are not successor plans.
(ii) First plan year defined.
(iii) Plans that are successor plans.
(3) Plans using different testing
methods for the ACP and ADP test.
(4) Rules for plan coverage change.
(i) In general.
(ii) Optional rule for minor plan
coverage changes.
(iii) Definitions.
(A) Plan coverage change.
(B) Prior year subgroup.
(C) Weighted average of the ACPs for the
prior year subgroups.
(iv) Examples.
§1.401(m)-3 Safe harbor requirements.
(a) ACP test safe harbor.
(b) Safe harbor nonelective contribution
requirement.
(c) Safe harbor matching contribution
requirement.
(d) Limitation on contributions.
(1) General rule.
(2) Matching rate must not increase.
(3) Limit on matching contributions.
(4) Limitation on rate of match.
(5) HCEs participating in multiple
plans.
(6) Permissible restrictions on elective
deferrals by NHCEs.
(i) General rule.
(ii) Restrictions on election periods.
(iii) Restrictions on amount of
contributions.
(iv) Restrictions on types of
compensation that may be deferred.
(v) Restrictions due to limitations
under the Internal Revenue Code.
(e) Notice requirement.
(f) Plan year requirement.
(1) General rule.
(2) Initial plan year.
(3) Change of plan year.
(4) Final plan year.
(g) Plan amendments adopting nonelective
safe harbor contributions.
(h) Permissible reduction or suspension
of safe harbor matching contributions.
(1) General rule.
(2) Notice of suspension requirement.
(i) Reserved.
(j) Other rules.
(1) Contributions taken into account.
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of safe harbor nonelective contributions
to satisfy other nondiscrimination
tests.
(3) Early participation rules.
(4) Satisfying safe harbor contribution
requirement under another defined
contribution
plan.
(5) Contributions used only once.
(6) Plan must satisfy ACP with respect
to employee contributions.
§1.401(m)-4 Special rules for mergers,
acquisitions and similar events.
[Reserved].
§1.401(m)-5 Definitions.
§1.401(m)-1 Employee contributions and
matching contributions.
(a) General nondiscrimination rules--(1)
Nondiscriminatory amount of
contributions-(
i) Exclusive means of amounts testing. A
defined contribution plan does not
satisfy
section 401(a) for a plan year unless
the amount of employee contributions and
matching
contributions to the plan for the plan
year satisfies section 401(a)(4). The
amount of
employee contributions and matching
contributions under a plan satisfies the
requirements
of section 401(a)(4) with respect to
amounts if and only if the amount of
employee
contributions and matching contributions
satisfies the nondiscrimination test of
section
401(m) under paragraph (b) of this
section and the plan satisfies the
additional
requirements of paragraph (c) of this
section. See
§1.401(a)(4)-1(b)(2)(ii)(B).
(ii) Testing benefits, rights and
features. A plan that provides for
employee
contributions or matching contributions
must satisfy the requirements of section
401(a)(4)
relating to benefits, rights and
features in addition to the requirement
regarding amounts
described in paragraph (a)(1)(i) of this
section. For example, the right to make
each level
of employee contributions and the right
to each level of matching contributions
under the
plan are benefits, rights or features
subject to the requirements of section
401(a)(4). See
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(2) Matching contributions--(i) In
general. For purposes of section 401(m),
this
section and §§1.401(m)-2 through
1.401(m)-5, matching contributions are-(
A) Any employer contribution (including
a contribution made at the employer’s
discretion) to a defined contribution
plan on account of an employee
contribution to a plan
maintained by the employer;
(B) Any employer contribution (including
a contribution made at the employer’s
discretion) to a defined contribution
plan on account of an elective deferral;
and
(C) Any forfeiture allocated on the
basis of employee contributions,
matching
contributions, or elective deferrals.
(ii) Employer contributions made on
account of an employee contribution or
elective deferral. Whether an employer
contribution is made on account of an
employee
contribution or an elective deferral is
determined on the basis of all the
relevant facts and
circumstances, including the
relationship between the employer
contribution and employee
actions outside the plan. An employer
contribution made to a defined
contribution plan on
account of contributions made by an
employee under an employer-sponsored
savings
arrangement that are not held in a plan
that is intended to be a qualified plan
or a plan
described in §1.402(g)-1(b) is not a
matching contribution.
(iii) Employer contributions not on
account of an employee contribution or
elective
deferral. An employer contribution is
not a matching contribution made on
account of an
elective deferral if it is contributed
before the cash or deferred election is
made or before
the employee’s performance of services
with respect to which the elective
deferral is made
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(3) Employee contributions--(i) In
general. For purposes of section 401(m),
this
section and §§1.401(m)-2 through
1.401(m)-5, employee contributions are
contributions to
a plan that are designated or treated at
the time of contribution as after-tax
employee
contributions (e.g., by treating the
contributions as taxable income subject
to applicable
withholding requirements) and are
allocated to an individual account for
each eligible
employee to which attributable earnings
and losses are allocated. See
§1.401(k)1(
a)(2)(ii). The term employee
contributions includes-(
A) Employee contributions to the defined
contribution portion of a plan described
in
section 414(k);
(B) Employee contributions applied to
the purchase of whole life insurance
protection or survivor benefit
protection under a defined contribution
plan;
(C) Amounts attributable to excess
contributions within the meaning of
section
401(k)(8)(B) that are recharacterized as
employee contributions under
§1.401(k)-2(b)(3);
and
(D) Employee contributions to a plan or
contract that satisfies the requirements
of
section 403(b).
(ii) Certain contributions not treated
as employee contributions. The term
employee
contributions does not include repayment
of loans, repayment of distributions
described in
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(iii) Qualified cost-of-living
arrangements. Employee contributions to
a qualified
cost-of-living arrangement described in
section 415(k)(2)(B) are treated as
employee
contributions to a defined contribution
plan, without regard to the requirement
that the
employee contributions be allocated to
an individual account to which
attributable earnings
and losses are allocated.
(b) Nondiscrimination requirements for
amount of contributions--(1) Matching
contributions and employee
contributions. The matching
contributions and employee
contributions under a plan satisfy this
paragraph (b) for a plan year only if
the plan
satisfies-(
i)The ACP test of section 401(m)(2)
described in §1.401(m)-2;
(ii) The ACP safe harbor provisions of
section 401(m)(11) described in
§1.401(m)3;
or
(iii) The SIMPLE 401(k) provisions of
sections 401(k)(11) and 401(m)(10)
described in §1.401(k)-4.
(2) Automatic satisfaction by certain
plans. Notwithstanding paragraph (b)(1)
of this
section, the requirements of this
section are treated as satisfied with
respect to employee
contributions and matching contributions
under a collectively bargained plan (or
the portion
of a plan) that automatically satisfies
section 410(b). See
§§1.401(a)(4)-1(c)(5) and
1.410(b)-2(b)(7). Additionally, the
requirements of sections 401(a)(4) and
410(b) do not
apply to a governmental plan (within the
meaning of section 414(d)) maintained by
a State
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(3) Anti-abuse provisions. Sections
1.401(m)-1 through 1.401(m)-5 are
designed
to provide simple, practical rules that
accommodate legitimate plan changes. At
the same
time, the rules are intended to be
applied by employers in a manner that
does not make
use of changes in plan testing
procedures or other plan provisions to
inflate inappropriately
the ACP for NHCEs (which is used as a
benchmark for testing the ACP for HCEs)
or to
otherwise manipulate the
nondiscrimination testing requirements
of this paragraph (b).
Further, this paragraph (b) is part of
the overall requirement that benefits or
contributions
not discriminate in favor of HCEs.
Therefore, a plan will not be treated as
satisfying the
requirements of this paragraph (b) if
there are repeated changes to plan
testing
procedures or plan provisions that have
the effect of distorting the ACP so as
to increase
significantly the permitted ACP for
HCEs, or otherwise manipulate the
nondiscrimination
rules of this paragraph, if a principal
purpose of the changes was to achieve
such a result.
(4) Aggregation and restructuring--(i)
In general. This paragraph (b)(4)
contains the
exclusive rules for aggregating and
disaggregating plans that provide for
employee
contributions and matching contributions
for purposes of this section and
§§1.401(m)-2
through 1.401(m)-5.
(ii) Aggregation of employee
contributions and matching contributions
within a plan.
Except as otherwise specifically
provided in this paragraph (b)(4) and
§1.401(m)-3(f)(1), a
plan must be subject to a single test
under paragraph (b)(1) of this section
with respect to
all employee contributions and matching
contributions and all eligible employees
under the
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(iii) Aggregation of plans--(A) In
general. The term plan means a plan
within the
meaning of §1.410(b)-7(a) and (b), after
application of the mandatory
disaggregation rules
of §1.410(b)-7(c), and the permissive
aggregation rules of §1.410(b)-7(d), as
modified by
paragraph (b)(4)(v) of this section.
Thus, for example, two plans (within the
meaning of
§1.410(b)-7(b)) that are treated as a
single plan pursuant to the permissive
aggregation
rules of §1.410(b)-7(d) are treated as a
single plan for purposes of sections
401(k) and
401(m).
(B) Arrangements with inconsistent ACP
testing methods. Pursuant to paragraph
(b)(4)(ii) of this section, a single
testing method must apply with respect
to all employee
contributions and matching contributions
and all eligible employees under a plan.
Thus, in
applying the permissive aggregation
rules of §1.410(b)-7(d), an employer may
not
aggregate plans (within the meaning of
§1.410(b)-7(b)) that apply inconsistent
testing
methods. For example, a plan (within the
meaning of §1.410(b)-7) that applies the
current
year testing method may not be
aggregated with another plan that
applies the prior year
testing method. Similarly, an employer
may not aggregate a plan (within the
meaning of
§1.410(b)-7) that is using the ACP safe
harbor provisions of section 401(m)(11)
and
another plan that is using the ACP test
of section 401(m)(2).
(iv) Disaggregation of plans and
separate testing--(A) In general. If
employee
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(B) Restructuring prohibited.
Restructuring under §1.401(a)(4)-9(c)
may not be
used to demonstrate compliance with the
requirements of section 401(m). See
§1.401(a)(4)-9(c)(3)(ii).
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disaggregation rules not applicable. The
mandatory disaggregation
rules relating to section 401(k) plans
and section 401(m) plans set forth in
§1.410(b)7(
c)(1) and to ESOP and non-ESOP portions
of a plan set forth in §1.410(b)-7(c)(2)
shall
not apply for purposes of this section
and §§1.401(m)-2 through 1.401(m)-5.
Accordingly,
notwithstanding §1.410(b)-7(d)(2), an
ESOP and a non-ESOP which are different
plans
(within the meaning of §1.410(b)-7(b))
are permitted to be aggregated for these
purposes.
(c) Additional requirements--(1)
Separate testing for employee
contributions and
matching contributions. Under
§1.410(b)-7(c)(1), the group of
employees who are eligible
to make employee contributions or
eligible to receive matching
contributions must satisfy
the requirements of section 410(b) as if
those employees were covered under a
separate
plan. The determination of whether the
separate plan satisfies the requirements
of section
410(b) must be made without regard to
the modifications to the disaggregation
rules set
forth in paragraph (b)(4)(v) of this
section. In addition, except as
expressly permitted under
section 401(k), 410(b)(2)(A)(ii), or
416(c)(2)(A), employee contributions,
matching
contributions and elective contributions
taken into account under
§1.401(m)-2(a)(6) may
not be taken into account for purposes
of determining whether any other
contributions
under any plan (including the plan to
which the employee contributions or
matching
contributions are made) satisfy the
requirements of section 401(a). See also
§1.401(a)(4)-11(g)(3)(vii) for special
rules relating to corrections of
violations of the
minimum coverage requirements or
discriminatory rates of matching
contributions.
(2) Plan provision requirement. A plan
that provides for employee contributions
or
matching contributions satisfies this
section only if it provides that the
nondiscrimination
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(d) Effective date. This section and
§§1.401(m)-2 through 1.401(m)-5 apply to
plan
years that begin on or after the date
that is 12 months after the issuance of
these
regulations in final form.
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(a) Actual contribution percentage (ACP)
test--(1) In general--(i) ACP test
formula.
A plan satisfies the ACP test for a plan
year only if-(
A) The ACP for the eligible HCEs for the
plan year is not more than the ACP for
the
eligible NHCEs for the applicable year
multiplied by 1.25; or
(B) The excess of the ACP for the
eligible HCEs for the plan year over the
ACP for
the eligible NHCEs for the applicable
year is not more than 2 percentage
points, and the
ACP for the eligible HCEs for the plan
year is not more than the ACP for the
eligible
NHCEs for the applicable year multiplied
by 2.
(ii) HCEs as sole eligible employees.
If, for the applicable year there are no
eligible
NHCEs (i.e., all of the eligible
employees under the plan for the
applicable year are
HCEs), the plan is deemed to satisfy the
ACP test.
(iii) Special rule for early
participation. If a plan providing for
employee
contributions or matching contributions
provides that employees are eligible to
participate
before they have completed the minimum
age and service requirements of section
410(a)(1)(A), and if the plan applies
section 410(b)(4)(B) in determining
whether the plan
meets the requirements of section
410(b)(1), then in determining whether
the plan meets
the requirements under paragraph (a)(1)
of this section either-(
A) Pursuant to section 401(m)(5)(C), the
ACP test is performed under the plan
(determined without regard to
disaggregation under §1.410(b)-7(c)(3)),
using the ACP for
all eligible HCEs for the plan year and
the ACP of eligible NHCEs for the
applicable year,
disregarding all NHCEs who have not met
the minimum age and service requirements
of
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(B) Pursuant to §1.401(m)-1(b)(4), the
plan is disaggregated into separate
plans
and the ACP test is performed separately
for all eligible employees who have
completed
the minimum age and service requirements
of section 410(a)(1)(A) and for all
eligible
employees who have not completed the
minimum age and service requirements of
section
410(a)(1)(A).
(2) Determination of ACP--(i) General
rule. The ACP for a group of eligible
employees (either eligible HCEs or
eligible NHCEs) for a plan year or
applicable year is
the average of the ACRs of eligible
employees in the group for that year.
The ACP for a
group of eligible employees is
calculated to the nearest hundredth of a
percentage point.
(ii) Determination of applicable year
under current year and prior year
testing
method. The ACP test is applied using
the prior year testing method or the
current year
testing method. Under the prior year
testing method, the applicable year for
determining
the ACP for the eligible NHCEs is the
plan year immediately preceding the plan
year for
which the ACP test is being calculated.
Under the prior year testing method, the
ACP for
the eligible NHCEs is determined using
the ACRs for the eligible employees who
were
NHCEs in that preceding plan year,
regardless of whether those NHCEs are
eligible
employees or NHCEs in the plan year for
which the ACP test is being performed.
Under
the current year testing method, the
applicable year for determining the ACP
for eligible
NHCEs is the same plan year as the plan
year for which the ACP test is being
calculated.
Under either method, the ACP for the
eligible HCEs is the determined using
the ACRs of
eligible employees who are HCEs for the
plan year for which the ACP test is
being
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(3) Determination of ACR--(i) General
rule. The ACR of an eligible employee
for
the plan year or applicable year is the
sum of the employee contributions and
matching
contributions taken into account with
respect to such employee (determined
under the rules
of paragraphs (a)(4) and (a)(5) of this
section), and the qualified nonelective
and elective
contributions taken into account under
paragraph (a)(6) of this section for the
year, divided
by the employee’s compensation taken
into account for the year. The ACR is
calculated to
the nearest hundredth of a percentage
point. If no employee contributions,
matching
contributions, elective contributions,
or qualified nonelective contributions
are taken into
account under this section with respect
to an eligible employee for the year,
the ACR of the
employee is zero.
(ii) ACR of HCEs eligible under more
than one plan--(A) General rule.
Pursuant to
section 401(m)(2)(B), the ACR of an HCE
who is an eligible employee in more than
one
plan of an employer to which matching
contributions or employee contributions
are made
is calculated by treating all
contributions with respect to such HCE
under any such plan as
being made under the plan being tested.
Thus, the ACR for such an HCE is
calculated by
accumulating all matching contributions
and employee contributions under any
plan (other
than a plan described in paragraph
(a)(3)(ii)(B) of this section) that
would be taken into
account under this section for the plan
year, if the plan under which the
contribution was
made applied this section and had the
same plan year. For example, in the case
of a plan
with a 12-month plan year, the ACR for
the plan year of that plan for an HCE
who
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(B) Plans not permitted to be
aggregated. Contributions under plans
that are not
permitted to be aggregated under
§1.401(m)-1(b)(4) (determined without
regard to the
prohibition on aggregating plans with
inconsistent testing methods set forth
in §1.401(m)1(
b)(4)(iii)(B) and the prohibition on
aggregating plans with different plan
years set forth in
§1.410(b)-7(d)(5)) are not aggregated
under this paragraph (a)(3)(ii).
(iii) Example. The following example
illustrates the application of paragraph
(a)(3)(ii) of this section. See also
§1.401(k)-2(a)(3)(iii) for additional
examples of the
application of the parallel rule under
section 401(k)(3)(A). The example is as
follows:
Example. Employee A, an HCE with
compensation of $120,000, is eligible to
make employee contributions under Plan S
and Plan T, two calendar-year
profit-sharing
plans of Employer H. Plan S and Plan T
use the same definition of compensation.
Plan S
provides a match equal to 50% of each
employee’s contributions and Plan T has
no
match. During the current plan year,
Employee A elects to contribute $4,000
in employee
contributions to Plan T and $4,000 in
employee contributions to Plan S. There
are no other
contributions made on behalf of Employee
A. Each plan must calculate Employee A’s
ACR by dividing the total employee
contributions by Employee A and matching
contributions under both plans by
$120,000. Therefore, Employee A’s ACR
under each
plan is 8.33% ($4,000+ $4,000+
$2,000/$120,000).
(4) Employee contributions and matching
contributions taken into account under
the
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i) Employee contributions. An employee
contribution is taken into account in
determining the ACR for an eligible
employee for the plan year or applicable
year in which
the contribution is made. For purposes
of the preceding sentence, an amount
withheld
from an employee’s pay (or a payment by
the employee to an agent of the plan) is
treated
as contributed at the time of such
withholding (or payment) if the funds
paid are transmitted
to the trust within a reasonable period
after the withholding (or payment).
(ii) Recharacterized elective
contributions. Excess contributions
recharacterized in
accordance with §1.401(k)-2(b)(3) are
taken into account as employee
contributions for
the plan year that includes the time at
which the excess contribution is
includible in the
gross income of the employee under
§1.401(k)-2(b)(3)(ii)(A).
(iii) Matching contributions. A matching
contribution is taken into account in
determining the ACR for an eligible
employee for a plan year or applicable
year only if
each of the following requirements is
satisfied-(
A) The matching contribution is
allocated to the employee’s account
under the
terms of the plan as of a date within
that year;
(B) The matching contribution is made on
account of (or the matching contribution
is
allocated on the basis of) the
employee’s elective deferrals or
employee contributions for
that year; and
(C) The matching contribution is
actually paid to the trust no later than
the end of the
12-month period immediately following
the year that contains that date.
(5) Matching contributions not taken
into account under the ACP test--(i)
General
rule. Matching contributions that do not
satisfy the requirements of paragraph
(a)(4)(iii) of
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(ii) Disproportionate matching
contributions--(A) Matching
contributions in excess of
100%. A matching contribution with
respect to any employee contribution or
elective
deferral for an NHCE is not taken into
account under the ACP test to the extent
the
matching rate with respect to the
employee contribution or elective
deferral exceeds the
greater of 100% and 2 times the plan’s
representative matching rate.
(B) Representative matching rate. For
purposes of this paragraph (a)(5)(ii),
the
plan’s representative matching rate is
the lowest matching rate for any
eligible NHCE
among a group of NHCEs that consists of
half of all eligible NHCEs in the plan
for the plan
year who make elective deferrals or
employee contributions for the plan year
(or, if greater,
the lowest matching rate for all
eligible NHCEs in the plan who are
employed by the
employer on the last day of the plan
year and who make elective deferrals or
employee
contributions for the plan year).
(C) Definition of matching rate. For
purposes of this paragraph (a)(5)(ii),
the
matching rate for an employee is the
matching contributions made for such
employee
divided by the elective deferrals or
employee contributions that are being
matched.
(iii) Qualified matching contributions
used to satisfy the ADP test. Qualified
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(iv) Matching contributions taken into
account under safe harbor provisions. A
plan
that satisfies the ACP safe harbor
requirements of section 401(m)(11) for a
plan year but
nonetheless must satisfy the
requirements of this section because it
provides for employee
contributions for such plan year is
permitted to apply this section
disregarding all matching
contributions with respect to all
eligible employees. In addition, a plan
that satisfies the
ADP safe harbor requirements of
§1.401(k)-3 for a plan year using
qualified matching
contributions but does not satisfy the
ACP safe harbor requirements of section
401(m)(11)
for such plan year is permitted to apply
this section by excluding matching
contributions
with respect to all eligible employees
that do not exceed 4% of each employee’s
compensation. If a plan disregards
matching contributions pursuant to this
paragraph
(a)(5)(iv), the disregard must apply
with respect to all eligible employees.
(v) Treatment of forfeited matching
contributions. A matching contribution
that is
forfeited because the contribution to
which it relates is treated as an excess
contribution,
excess deferral, or excess aggregate
contribution is not taken into account
for purposes of
this section.
(6) Qualified nonelective contributions
and elective contributions that may be
taken
into account under the ACP test.
Qualified nonelective contributions and
elective
contributions may be taken into account
in determining the ACR for an eligible
employee
for a plan year or applicable year, but
only to the extent the contributions
satisfy the
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(i) Timing of allocation. The qualified
nonelective contribution is allocated to
the
employee’s account as of a date within
that year (within the meaning of
§1.401(k)2(
a)(4)(i)(A)) and the elective
contribution satisfies
§1.401(k)-2(a)(4)(i). Consequently,
under the prior year testing method, in
order to be taken into account in
calculating the
ACP for the group of eligible NHCEs for
the applicable year, a qualified
nonelective
contribution must be contributed no
later than the end of the 12-month
period following the
applicable year even though the
applicable year is different than the
plan year being
tested.
(ii) Elective contributions taken into
account under the ACP test. Elective
contributions may be taken into account
for the ACP test only if the cash or
deferred
arrangement under which the elective
contributions are made is required to
satisfy the
ADP test in §1.401(k)-2(a)(1) and, then
only to the extent that the cash or
deferred
arrangement would satisfy that test,
including such elective contributions in
the ADP for the
plan year or applicable year. Thus, for
example, elective deferrals made
pursuant to a
salary reduction agreement under an
annuity described in section 403(b) are
not permitted
to be taken into account in an ACP test.
Similarly, elective contributions under
a cash or
deferred arrangement that is using the
section 401(k) safe harbor described in
§1.401(k)3
can not be taken into account in an ACP
test.
(iii) Requirement that amount satisfy
section 401(a)(4). The amount of
nonelective
contributions, including those qualified
nonelective contributions taken into
account under
this paragraph (a)(6) and those
qualified nonelective contributions
taken into account for
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contributions, excluding those qualified
nonelective contributions taken into
account under
this paragraph (a)(6) for the ACP test
and those qualified nonelective
contributions taken
into account for the ADP test under
paragraph §1.401(k)-2(a)(6), satisfies
the
requirements of section 401(a)(4). See
§1.401(a)(4)-1(b)(2). In the case of an
employer
that is applying the special rule for
employer-wide plans in
§1.414(r)-1(c)(2)(ii) with respect
to the plan, the determination of
whether the qualified nonelective
contributions satisfy the
requirements of this paragraph
(a)(6)(iii) must be made on an
employer-wide basis
regardless of whether the plans to which
the qualified nonelective contributions
are made
are satisfying the requirements of
section 410(b) on an employer-wide
basis. Conversely,
in the case of an employer that is
treated as operating qualified separate
lines of business,
and does not apply the special rule for
employer-wide plans in
§1.414(r)-1(c)(2)(ii) with
respect to the plan, then the
determination of whether the qualified
nonelective
contributions satisfy the requirements
of this paragraph (a)(6)(iii) is not
permitted to be
made on an employer-wide basis
regardless of whether the plans to which
the qualified
nonelective contributions are made are
satisfying the requirements of section
410(b) on
that basis.
(iv) Aggregation must be permitted. The
plan that provides for employee or
matching contributions and the plan or
plans to which the qualified nonelective
contributions or elective contributions
are made are plans that would be
permitted to be
aggregated under §1.401(m)-1(b)(4). If
the plan year of the plan that provides
for
employee or matching contributions is
changed to satisfy the requirement under
§1.410(b)
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(v) Disproportionate contributions not
taken into account--(A) General rule.
Qualified nonelective contributions
cannot be taken into account for an
applicable year for
an NHCE to the extent such contributions
exceed the product that NHCE’s
compensation
and the greater of 5% and 2 times the
plan's representative contribution rate.
Any qualified
nonelective contribution taken into
account in an ADP test under
§1.401(k)-2(a)(6)
(including the determination of the
representative contribution rate for
purposes of
§1.401(k)-2(a)(6)(iv)(B)) is not
permitted to be taken into account for
purposes of this
paragraph (a)(6) (including the
determination of the representative
contribution rate for
purposes of paragraph (a)(6)(v)(B) of
this section).
(B) Definition of representative
contribution rate. For purposes of this
paragraph
(a)(6)(v), the plan's representative
contribution rate is the lowest
applicable contribution
rate of any eligible NHCE among a group
of eligible NHCEs that consists of half
of all
eligible NHCEs for the plan year (or, if
greater, the lowest applicable
contribution rate of
any eligible NHCE in the group of all
eligible NHCEs for the applicable year
and who is
employed by the employer on the last day
of the applicable year).
(C) Definition of applicable
contribution rate. For purposes of this
paragraph
(a)(6)(v), the applicable contribution
rate for an eligible NHCE is the sum of
the matching
contributions taken into account under
this section for the employee for the
plan year and
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(vi) Contribution only used once.
Qualified nonelective contributions can
not be
taken into account under this paragraph
(a)(6) to the extent such contributions
are taken
into account for purposes of satisfying
any other ACP test, any ADP test, or the
requirements of §1.401(k)-3, 1.401(m)-3
or 1.401(k)-4. Thus, for example,
qualified
nonelective contributions that are made
pursuant to §1.401(k)-3(b) cannot be
taken into
account under the ACP test. Similarly,
if a plan switches from the current year
testing
method to the prior year testing method
pursuant to §1.401(m)-2(c)(1), qualified
nonelective contributions that are taken
into account under the current year
testing method
for a plan year may not be taken into
account under the prior year testing
method for the
next plan year.
(7) Examples. The following examples
illustrate the application of this
paragraph
(a). See §1.401(k)-2(a)(6) for
additional examples of the parallel
rules under section
401(k)(3)(A). The examples are as
follows:
Example 1. (i) Employer L maintains Plan
U, a profit-sharing plan under which
$.50
matching contributions are made for each
dollar of employee contributions. Plan U
uses
the current year testing method. The
chart below shows the average employee
contributions (as a percentage of
compensation) and matching contributions
(as a
percentage of compensation) for Plan U’s
highly compensated employees and
nonhighly
compensated employees for the 2006 plan
year:
-185
-185Matching
Contributions
Actual Contribution
Percentage
Highly compensated
employees
4% 2% 6%
Nonhighly compensated
employees
3% 1.5% 4.5%
(ii) The matching rate for all NHCEs is
50% and thus the matching contributions
are
not disproportionate under paragraph
(a)(5)(ii) of this section. Accordingly,
they are taken
into account in determining the ACR of
eligible employees, as shown in the
following table.
(iii) Because the ACP for the HCEs
(6.0%) exceeds 5.63% (4.5% x 1.25), Plan
U
does not satisfy the ACP test under
paragraph (a)(1)(i)(A) of this section.
However,
because the ACP for the HCEs does not
exceed the ACP for the NHCEs by more
than 2
percentage points and the ACP for the
HCEs does not exceed the ACP for the
NHCEs
multiplied by 2 (4.5% x 2 = 9%), the
plan satisfies the ACP test under
paragraph
(a)(1)(i)(B) of this section.
Example 2. (i) Employees A through F are
eligible employees in Plan V, a profit-
sharing plan of Employer M that includes
a cash or deferred arrangement and
permits
employee contributions. Under Plan V, a
$.50 matching contribution is made for
each
dollar of elective contributions and
employee contributions. Plan V uses the
current year
testing method and does not provide for
elective contributions to be taken into
account in
determining an eligible employee’s ACR.
For the 2006 plan year, Employees A and
B are
HCEs and the remaining employees are
NHCEs. The compensation, elective
contributions, employee contributions,
and matching contributions for the 2006
plan year
are shown in the following table:
-186
-186Compensation
Elective
Contributions
Employee
Contributions
Matching
Contributions
A $190,000 $15,000 $3,500 $9,250
B 100,000 $ 5,000 $10,000 $7,500
C 85,000 $12,000 $ 0 $6,000
D 70,000 $ 9,500 $ 0 $4,750
E 40,000 $ 10,000 $ 0 $5,000
F 10,000 $ 0 $ 0 $ 0
(ii) The matching rate for all NHCEs is
50% and thus the matching contributions
are
not disproportionate under paragraph
(a)(5)(ii) of this section. Accordingly,
they are taken
into account in determining the ACR of
eligible employees, as shown in the
following table:
Employee Compensation Employee
Contributions
Matching
Contributions
ACR %
A $190,000 $3,500 $9,250 6.71
B 100,000 $10,000 $7,500 17.50
C 85,000 $ 0 $6,000 7.06
D 70,000 $ 0 $4,750 6.79
E 40,000 $ 0 $ 5,000 12.50
F 10,000 $ 0 $ 0 0
(iii) The ACP for the HCEs is 12.11%
((6.71% + 17.50%)/2). The ACP for the
NHCEs is 6.59% ((7.06% + 6.79% + 12.50%
+ 0.%)/4). Plan V fails to satisfy the
ACP
test under paragraph (a)(1)(i)(A) of
this section because the ACP of highly
compensated
employees is more than 125% of the ACP
of the nonhighly compensated employees
(6.59% × 1.25 = 8.24%). In addition,
Plan V fails to satisfy the ACP test
under paragraph
(a)(1)(i)(B) of this section because the
ACP for the HCEs exceeds the ACP of the
other
employees by more than 2 percentage
points (6.59% + 2% = 8.59%). Therefore,
the plan
fails to satisfy the requirements of
section 401(m)(2) and paragraph (a)(1)
of this section
unless the ACP failure is corrected
under paragraph (b) of this section.
-187
-187.
(i) The facts are the same as Example 2,
except that the plan
provides that the nonhighly compensated
employees’ elective contributions may be
used
to meet the requirements of section
401(m) to the extent needed under that
section.
(ii) Pursuant to paragraph (a)(6)(ii) of
this section, the $10,000 of elective
contributions for Employee E may be
taken into account in determining the
ACP rather
than the ADP to the extent that the plan
satisfies the requirements of
§1.401(k)-2(a)(1)
excluding from the ADP this $10,000. In
this case, if the $10,000 were excluded
from the
ADP for the NHCEs, the ADP for the
highly compensated employees is 6.45%
(7.89% +
5.00%) /2 and the ADP for the nonhighly
compensated employees would be 6.92%
(14.12% + 13.57% + 0% +0%)/4) and the
plan would satisfy the requirements of
§1.401(k)2(
a)(1) excluding from the ADP the
elective contributions for NHCEs that
are taken into
account under section 401(m).
(iii) After taking into account the
$10,000 of elective contributions for
Employee E in
the ACP test, the ACP for the nonhighly
compensated employees is 12.84% (7.06% +
6.79% + 37.50 % + 0%) /4. Therefore the
plan satisfies the ACP test because the
ACP for
the HCEs (12.11%) is less than 1.25
times the ACP for the nonhighly
compensated
employees.
Example 4. (i) The facts are the same as
Example 2, except that Plan V provides
for a higher than 50% match rate on the
elective contributions and employee
contributions
for all NHCEs. The match rate is defined
as the rate, rounded up to the next
whole percent,
necessary to allow the plan to satisfy
the ACP test, but not in excess of 100%.
In this case,
an increase in the match rate from 50%
to 74% will be sufficient to allow the
plan to satisfy
the ACP test. Thus, for the 2006 plan
year, the compensation, elective
contributions,
employee contributions, matching
contributions at a 74% match rate of the
eligible NHCEs
(employees C through F) are shown in the
following table:
Employee Compensation Elective
Contributions
Employee
Contributions
Matching
Contributions
C $ 85,000 $ 12,000 $ 0 $ 8,880
D 70,000 $ 9,500 $ 0 $ 7,030
E 40,000 $ 10,000 $ 0 $ 7,400
F 10,000 $ 0 $ 0 $ 0
(ii) The matching rate for all NHCEs is
74% and thus the matching contributions
are
not disproportionate under paragraph
(a)(5)(ii) of this section. Therefore,
the matching
contributions may be taken into account
in determining the ACP for the NHCEs.
-188
-188The
ACP for the NHCEs is 9.75% (10.45% +
10.04% + 18.50% + 0%)/4.
Because the ACP for the HCEs (12.11%) is
less than 1.25 times the ACP for the
NHCEs,
the plan satisfies the requirements of
section 401(m).
Example 5. (i) The facts are the same as
Example 4, except that: Employee E’s
elective contributions are $2,000
(rather than $10,000) and pursuant to
paragraph (a)(6)(ii)
of this section, the $2,000 of elective
contributions for Employee E are taken
into account
in determining the ACP rather than the
ADP. In addition, Plan V provides that
the higher
match rate is not limited to 100% and
applies only for a specified group of
nonhighly
compensated employees. The only member
of that group is Employee E. Under the
plan
provision, the higher match rate is a
400% match. Thus, for the 2006 plan
year, the
compensation, elective contributions,
employee contributions, matching
contributions of
the eligible NHCEs (employees C through
F) are shown in the following table:
Employee Compensation Elective
Contributions
Employee
Contributions
Matching
Contributions
C $ 85,000 $12,000 $ 0 $6,000
D 70,000 $ 9,500 $ 0 $4,750
E 40,000 $ 2,000 $ 0 $8,000
F 10,000 $ 0 $ 0 $ 0
(ii) If the entire matching contribution
made on behalf of Employee E were taken
into
account under the ACP test, Plan V would
satisfy the test, because the ACP for
the
NHCEs would be 9.71% (7.06% + 6.79% +
25.00% + 0%)/4. Because the ACP for the
HCEs (12.11%) is less than 1.25 times
what the ACP for the NHCEs would be, the
plan
would satisfy the requirements of
section 401(m).
(iii) Pursuant to paragraph (a)(5)(ii)
of this section, however, matching
contributions
for an eligible NHCE that are based on a
matching rate in excess of the greater
of 100%
and twice the plan’s representative
matching rate cannot be taken into
account in applying
the ACP test. The plan’s representative
matching rate is the lowest matching
rate for any
eligible employee in a group of NHCEs
that is at least half of all eligible
employees who
are NHCEs in the plan for the plan year
who make elective contributions or
employee
contributions for the plan year. For
Plan V, the group of NHCEs who make such
contributions consists of Employees C, D
and E. The matching rates for these
three
employees are 50%, 50% and 400%
respectively. The lowest matching rate
for a group of
NHCEs that is at least ½ of all the
NHCEs who make elective contributions or
employee
contributions (or 2 NHCEs) is 50%.
Because 400% is more than twice the
plan’s
representative matching rate, only the
matching contributions made on behalf of
Employee
E that do not exceed 100% (or in this
case $2,000) satisfy the requirements of
paragraph
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-189
Example 6. (i) The facts are the same as
Example 2, except that Plan V provides
a QNEC equal to 13% of pay for Employee
F that will be taken into account under
the ACP
test to the extent the contributions
satisfy the requirements of paragraph
(a)(6) of this
section.
(ii) Pursuant to paragraph (a)(6)(v) of
this section, a QNEC cannot be taken
into
account in determining an NHCE’s ACR to
the extent it exceeds the greater of 5%
and the
product of the employee’s compensation
and the plan’s representative
contribution rate.
The plan’s representative contribution
rate is two times the lowest applicable
contribution
rate for any eligible employee in a
group of NHCEs that is at least half of
all eligible
employees who are NHCEs in the plan for
the plan year. For Plan V, the
applicable
contribution rates for Employees C, D, E
and F are 7.06%, 6.79%, 12.5% and 13%
respectively. The lowest applicable rate
for a group of NHCEs that is at least ½
of all the
NHCEs is 12.50% (the lowest applicable
rate for the group of NHCEs that
consists of
Employees E and F).
(iii) Under paragraph (a)(6)(v)(B) of
this section, the plan’s representative
contribution rate is 2 times 12.50% or
25.00%. Accordingly, the QNECs for
Employee F
can be taken into account under the ACP
test only to the extent they do not
exceed 25.00%
of compensation. In this case, all of
the QNECs for Employee F may be taken
into
account under the ACP test.
(iv) After taking into account the QNECs
for Employee F, the ACP for the NHCEs is
9.84% (7.06% + 6.79% + 12.50% + 13%)/4.
Because the ACP for the HCEs (12.11%) is
less than 1.25 times the ACP for the
NHCEs, the plan satisfies the
requirements of section
401(m)(2) and paragraph (a)(1) of this
section.
(b) Correction of excess aggregate
contributions--(1) Permissible
correction
methods--(i) In general. A plan that
provides for employee contributions or
matching
contributions does not fail to satisfy
the requirements of section 401(m)(2)
and paragraph
(a)(1) of this section if the employer,
in accordance with the terms of the
plan, uses either
of the following correction methods-
(A) Additional contributions. The
employer makes additional contributions
that are
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-190
(B) Excess aggregate contributions
distributed or forfeited. Excess
aggregate
contributions are distributed or
forfeited in accordance with paragraph
(b)(2) of this
section.
(ii) Combination of correction methods.
A plan may provide for the use of either
of
the correction methods described in
paragraph (b)(1)(i) of this section, may
limit employee
contributions or matching contributions
in a manner that prevents excess
aggregate
contributions from being made, or may
use a combination of these methods, to
avoid or
correct excess aggregate contributions.
If a plan uses a combination of
correction
methods, any contributions made under
paragraph (b)(1)(i)(A) of this section
must be
taken into account before application of
the correction method in paragraph
(b)(1)(i)(B) of
this section.
(iii) Exclusive means of correction. A
failure to satisfy the requirements of
paragraph (a)(1) of this section may not
be corrected using any method other than
one
described in paragraph (b)(1)(i) or (ii)
of this section. Thus, excess aggregate
contributions for a plan year may not be
corrected by forfeiting vested matching
contributions, distributing nonvested
matching contributions, recharacterizing
matching
contributions, or not making matching
contributions required under the terms
of the plan.
Similarly, excess aggregate
contributions for a plan year may not
remain unallocated or be
allocated to a suspense account for
allocation to one or more employees in
any future
-191year.
In addition, excess aggregate
contributions may not be corrected using
the
retroactive correction rules of
§1.401(a)(4)-11(g). See
§1.401(a)(4)-11(g)(3)(vii) and (5).
-191year.
In addition, excess aggregate
contributions may not be corrected using
the
retroactive correction rules of
§1.401(a)(4)-11(g). See
§1.401(a)(4)-11(g)(3)(vii) and (5).
Correction through distribution--(i)
General rule. This paragraph (b)(2)
contains
the rules for correction of excess
aggregate contributions through a
distribution from the
plan. Correction through a distribution
generally involves a four step process.
First, the
plan must determine, in accordance with
paragraph (b)(2)(ii) of this section,
the total
amount of excess aggregate contributions
that must be distributed under the plan.
Second, the plan must apportion the
total amount of excess aggregate
contributions
among the HCEs in accordance with
paragraph (b)(2)(iii) of this section.
Third, the plan
must determine the income allocable to
excess aggregate contributions in
accordance
with paragraph (b)(2)(iv) of this
section. Finally, the plan must
distribute the apportioned
contributions, together with allocable
income (or forfeit the apportioned
matching
contributions, if forfeitable) in
accordance with paragraph (b)(2)(v) of
this section.
Paragraph (b)(2)(vi) of this section
provides rules relating to the tax
treatment of these
distributions.
(ii) Calculation of total amount to be
distributed. The following procedures
must be
used to determine the total amount of
the excess aggregate contributions to be
distributed-(
A) Calculate the dollar amount of excess
aggregate contributions for each HCE.
The amount of excess aggregate
contributions attributable to an HCE for
a plan year is the
amount (if any) by which the HCE’s
contributions taken into account under
this section must
be reduced for the HCE’s ACR to equal
the highest permitted ACR under the
plan. To
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-192
(B) Determination of the total amount of
excess aggregate contributions. The
process described in paragraph
(b)(2)(ii)(A) of this section must be
repeated until the plan
would satisfy the requirements of
paragraph (b)(2)(ii)(C) of this section.
The sum of all
reductions for all HCEs determined under
paragraph (b)(2)(ii)(A) of this section
is the total
amount of excess aggregate contributions
for the plan year.
(C) Satisfaction of ACP. A plan
satisfies this paragraph (b)(2)(ii)(C)
if the plan
would satisfy the requirements of
paragraph (a)(1)(i) of this section if
the ACR for each
HCE were determined after the reductions
described in paragraph (b)(2)(ii)(A) of
this
section.
(iii) Apportionment of total amount of
excess aggregate contributions among the
HCEs. The following procedures must be
used in apportioning the total amount of
excess
aggregate contributions determined under
paragraph (b)(2)(ii) of this section
among the
HCEs-(
A) Calculate the dollar amount of excess
aggregate contributions for each HCE.
The contributions with respect to the
HCE with the highest dollar amount of
contributions
taken account under this section are
reduced by the amount required to cause
that HCE’s
contributions to equal the dollar amount
of contributions taken into account
under this
section for the HCE with the next
highest dollar amount of such
contributions. If a lesser
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(B) Limit on amount apportioned to any
HCE. For purposes of this paragraph
(b)(2)(iii), the contributions for an
HCE who is an eligible employee in more
than one plan
of an employer to which matching
contributions and employee contributions
are made is
determined by adding together all
contributions otherwise taken into
account in
determining the ACR of the HCE under the
rules of paragraph (a)(3)(ii) of this
section.
However, the amount of contributions
apportioned with respect to an HCE must
not exceed
the amount of contributions taken into
account under this section that were
actually made
on behalf of the HCE to the plan for the
plan year. Thus, in the case of an HCE
who is an
eligible employee in more than one plan
of the same employer to which employee
contributions or matching contributions
are made and whose ACR is calculated in
accordance with paragraph (a)(3)(ii) of
this section, the amount distributed
under this
paragraph (b)(2)(iii) will not exceed
such contributions actually contributed
to the plan for
the plan year that are taken into
account under this section for the plan
year.
(C) Apportionment to additional HCEs.
The procedure in paragraph
(b)(2)(iii)(A) of
this section must be repeated until the
total amount of excess aggregate
contributions
have been apportioned.
(iv) Income allocable to excess
aggregate contributions--(A) General
rule. The
income allocable to excess aggregate
contributions is equal to the sum of the
allocable
gain or loss for the plan year and, to
the extent the excess aggregate
contributions are or
will be credited with allocable gain or
loss for the period after the close of
the plan year (the
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(B) Method of allocating income. A plan
may use any reasonable method for
computing the income allocable to excess
aggregate contributions, provided that
the
method does not violate section
401(a)(4), is used consistently for all
participants and for
all corrective distributions under the
plan for the plan year, and is used by
the plan for
allocating income to participants’
accounts. See §1.401(a)(4)-1(c)(8).
(C) Alternative method of allocating
income for the plan year. A plan may
allocate
income to excess aggregate contributions
for the plan year by multiplying the
income for
the plan year allocable to employee
contributions, matching contributions
and other
amounts taken into account under this
section (including the contributions for
the year), by
a fraction, the numerator of which is
the excess aggregate contributions for
the employee
for the plan year, and the denominator
of which is the account balance
attributable to
employee contributions and matching
contributions and other amounts taken
into account
under this section as of the beginning
of the plan year (including any
additional such
contributions for the plan year).
(D) Safe harbor method of allocating gap
period income. A plan may use the safe
harbor method in this paragraph
(b)(2)(iv)(D) to determine income on
excess aggregate
contributions for the gap period. Under
this safe harbor method, income on
excess
aggregate contributions for the gap
period is equal to 10% of the income
allocable to
excess aggregate contributions for the
plan year that would be determined under
paragraph (b)(2)(iv)(C) of this section,
multiplied by the number of calendar
months that
have elapsed since the end of the plan
year. For purposes of calculating the
number of
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(E) Alternative method of allocating
plan year and gap period income. A plan
may
determine the allocable gain or loss for
the aggregate of the plan year and the
gap period
by applying the alternative method
provided by paragraph (b)(2)(iv)(C) of
this section to
that aggregate period. This is
accomplished by substituting the income
for the plan year
and the gap period for the income for
the plan year and by substituting the
contributions
taken into account under this section
for the plan year and the gap period for
the
contributions taken into account for the
plan year in determining the fraction
that is
multiplied by that income.
(F) Allocable income for recharacterized
elective contributions. If
recharacterized
elective contributions are distributed
as excess aggregate contributions, the
income
allocable to the excess aggregate
contributions is determined as if
recharacterized
elective contributions had been
distributed as excess contributions.
Thus, income must be
allocated to the recharacterized amounts
distributed using the methods in
§1.401(k)2(
b)(2)(iv).
(v) Distribution and forfeiture. Within
12 months after the close of the plan
year in
which the excess aggregate contribution
arose, the plan must distribute to each
HCE the
contributions apportioned to such HCE
under paragraph (b)(2)(iii) of this
section (and the
allocable income) to the extent they are
vested or forfeit such amounts, if
forfeitable.
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as otherwise provided in this paragraph
(b)(2)(v), a distribution of excess
aggregate contributions must be in
addition to any other distributions made
during the year
and must be designated as a corrective
distribution by the employer. In the
event of a
complete termination of the plan during
the plan year in which an excess
aggregate
contribution arose, the corrective
distribution must be made as soon as
administratively
feasible after the date of termination
of the plan, but in no event later than
12 months after
the date of termination. If the entire
account balance of an HCE is distributed
prior to when
the plan makes a distribution of excess
aggregate contributions in accordance
with this
paragraph (b)(2), the distribution is
deemed to have been a corrective
distribution of
excess aggregate contributions (and
income) to the extent that a corrective
distribution
would otherwise have been required.
-196Except
as otherwise provided in this paragraph
(b)(2)(v), a distribution of excess
aggregate contributions must be in
addition to any other distributions made
during the year
and must be designated as a corrective
distribution by the employer. In the
event of a
complete termination of the plan during
the plan year in which an excess
aggregate
contribution arose, the corrective
distribution must be made as soon as
administratively
feasible after the date of termination
of the plan, but in no event later than
12 months after
the date of termination. If the entire
account balance of an HCE is distributed
prior to when
the plan makes a distribution of excess
aggregate contributions in accordance
with this
paragraph (b)(2), the distribution is
deemed to have been a corrective
distribution of
excess aggregate contributions (and
income) to the extent that a corrective
distribution
would otherwise have been required.
Tax treatment of corrective
distributions--(A) General rule. Except
as otherwise
provided in paragraph (b)(2)(vi)(B) of
this section, a corrective distribution
of excess
aggregate contributions (and income)
that is made within 2½ months after the
end of the
plan year for which the excess aggregate
contributions were made is includible in
the
employee’s gross income for the taxable
year of the employee ending with or
within the
plan year for which the excess aggregate
contributions were made. A corrective
distribution of excess aggregate
contributions (and income) that is made
more than 2½
months after the plan year for which the
excess aggregate contributions were made
is
includible in the employee’s gross
income in the taxable year of the
employee in which
distributed. The portion of the
distribution that is treated as an
investment in the contract
under section 72 is determined without
regard to any plan contributions other
than those
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(B) Rule for de minimis distributions.
If the total amount of excess aggregate
contributions determined under this
paragraph (b)(2), and excess
contributions determined
under §1.401(k)-2(b)(2) distributed to a
recipient under a plan for any plan year
is less than
$100 (excluding income), a corrective
distribution of excess aggregate
contributions (and
income) is includible in gross income in
the recipient’s taxable year in which
the corrective
distribution is made.
(3) Other rules--(i) No employee or
spousal consent required. A distribution
of
excess aggregate contributions (and
income) may be made under the terms of
the plan
without regard to any notice or consent
otherwise required under sections
411(a)(11) and
417.
(ii) Treatment of corrective
distributions and forfeited
contributions as employer
contributions. Excess aggregate
contributions (other than amounts
attributable to
employee contributions), including
forfeited matching contributions, are
treated as
employer contributions for purposes of
sections 404 and 415 even if distributed
from the
plan. Forfeited matching contributions
that are reallocated to the accounts of
other
participants for the plan year in which
the forfeiture occurs are treated under
section 415
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(iii) No reduction of required minimum
distribution. A distribution of excess
aggregate contributions (and income) is
not treated as a distribution for
purposes of
determining whether the plan satisfies
the minimum distribution requirements of
section
401(a)(9). See §1.401(a)(9)-5, A-9(b).
(iv) Partial correction. Any
distribution of less than the entire
amount of excess
aggregate contributions (and allocable
income) is treated as a pro rata
distribution of
excess aggregate contributions and
allocable income.
(v) Matching contributions on excess
contributions, excess deferrals and
excess
aggregate contributions--(A) Corrective
distributions not permitted. A matching
contribution may not be distributed
merely because the contribution to which
it relates is
treated as an excess contribution,
excess deferral, or excess aggregate
contribution.
(B) Coordination with section 401(a)(4).
A matching contribution is taken into
account under section 401(a)(4) even if
the match is distributed, unless the
distributed
contribution is an excess aggregate
contribution. This requires that, after
correction of
excess aggregate contributions, each
level of matching contributions be
currently and
effectively available to a group of
employees that satisfies section 410(b).
See
§1.401(a)(4)-4(e)(3)(iii)(G). Thus, a
plan that provides the same rate of
matching
contributions to all employees will not
meet the requirements of section
401(a)(4) if
employee contributions are distributed
under this paragraph (b) to HCEs to the
extent
needed to meet the requirements of
section 401(m)(2), while matching
contributions
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(vi) No requirement for recalculation.
If the distributions and forfeitures
described in
paragraph (b)(2) of this section are
made, the employee contributions and
matching
contributions are treated as meeting the
nondiscrimination test of section
401(m)(2)
regardless of whether the ACP for the
HCEs, if recalculated after the
distributions and
forfeitures, would satisfy section
401(m)(2).
(4) Failure to timely correct--(i)
Failure to correct within 2½ months
after end of plan
year. If a plan does not correct excess
aggregate contributions within 2½ months
after the
close of the plan year for which the
excess aggregate contributions are made,
the
employer will be liable for a 10% excise
tax on the amount of the excess
aggregate
contributions. See section 4979 and
§54.4979-1 of this chapter. Qualified
nonelective
contributions properly taken into
account under paragraph (a)(6) of this
section for a plan
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(ii) Failure to correct within 12 months
after end of plan year. If excess
aggregate
contributions are not corrected within
12 months after the close of the plan
year for which
they were made, the plan will fail to
meet the requirements of section
401(a)(4) for the plan
year for which the excess aggregate
contributions were made and all
subsequent plan
years in which the excess aggregate
contributions remain in the trust.
(5) Examples. The following examples
illustrate the application of this
paragraph.
See also §1.401(k)-2(b) for additional
examples of the parallel correction
rules applicable
to cash or deferred arrangements. For
purposes of these examples, none of the
plans
provide for catch-up contributions under
section 414(v). The examples are as
follows:
Example 1. (i) Employer L maintains a
plan that provides for employee
contributions and fully vested matching
contributions. The plan provides that
failures of the
ACP test are corrected by distribution.
In 2006, the ACP for the eligible NHCEs
is 6%.
Thus, the ACP for the eligible HCEs may
not exceed 8%. The three HCEs who
participate
have the following compensation,
contributions, and ACRs:
Employee Compensation Employee
contributions and
matching contributions
Actual Contribution
Ratio
A 200,000 14,000 7%
B 150,000 13,500 9
C 100,000 12,000 12
Average 9.33%
(ii) The total amount of excess
aggregate contributions for the HCEs is
determined
under paragraph (b)(2)(ii) of this
section as follows: the matching and
employee
contributions of Employee C (the HCE
with the highest ACR) is reduced by 3%
of
compensation (or $3,000) in order to
reduce the ACR of that HCE to 9%, which
is the ACR
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(iii) Because the ACP of the HCEs
determined after the $3,000 reduction
still
exceeds 8%, further reductions in
matching contributions and employee
contributions are
necessary in order to reduce the ACP of
the HCEs to 8%. The employee
contributions
and matching contributions for Employees
B and C are reduced by an additional .5%
of
compensation or $1,250 ($750 and $500
respectively). Because the ACP of the
HCEs
determined after the reductions now
equals 8%, the plan would satisfy the
requirements of
(a)(1)(ii) of this section.
(iv) The total amount of excess
aggregate contributions ($4,250) is
apportioned
among the HCEs under paragraph
(b)(2)(iii) of this section first to the
HCE with the highest
amount of matching contributions and
employee contributions. Therefore,
Employee A is
apportioned $500 (the amount required to
cause A’s matching contributions and
employee
contributions to equal the next highest
dollar amount of matching contributions
and
employee contributions).
(v) Because the total amount of excess
aggregate contributions has not been
apportioned, further apportionment is
necessary. The balance ($3,750) of the
total amount
of excess aggregate contributions is
apportioned equally among Employees A
and B
($1,500 to each, the amount required to
cause their contributions to equal the
next highest
dollar amount of matching contributions
and employee contributions).
(vi) Because the total amount of excess
aggregate contributions has not been
apportioned, further apportionment is
necessary. The balance ($750) of the
total amount
of excess aggregate contributions is
apportioned equally among Employees A, B
and C
($250 to each, the amount required to
allocate the total amount of excess
aggregate
contributions for the plan).
(vii) Therefore, the plan will satisfy
the requirements of paragraph (a)(1) of
this
section if, by the end of the 12 month
period following the end of the 2006
plan year,
Employee A receives a corrective
distribution of excess aggregate
contributions equal to
$ 2,250 ($500 + $1,500 + $250) and
allocable income, Employee B receives a
corrective
distribution of $250 and allocable
income and Employee C receives a
corrective
distribution of $1,750 ($1,500 + $250)
and allocable income.
Example 2. (i) Employee D is the sole
HCE who is eligible to participate in a
cash
or deferred arrangement maintained by
Employer M. The plan that includes the
arrangement, Plan X, permits employee
contributions and provides a fully
vested matching
contribution equal to 50% of elective
contributions. Plan X is a calendar year
plan. Plan X
corrects excess contributions by
recharacterization and provides that
failures of the ACP
test are corrected by distribution. For
the 2006 plan year, D’s compensation is
$200,000,
and D’s elective contributions are
$15,000. The actual deferral percentages
and actual
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Actual Deferral Percentage Actual
Contribution
Percentage
Employee D 7.5% 3.75 %
NHCEs 4 % 2%
(ii) In February 2007, Employer M
determines that D’s actual deferral
ratio must be
reduced to 6%, or $12,000, which
requires a recharacterization of $3,000
as an employee
contribution. This increases D’s actual
contribution ratio to 5.25% ($7,500 in
matching
contributions plus $3,000
recharacterized as employee
contributions, divided by $200,000
in compensation). Since D’s actual
contribution ratio must be limited to 4%
for Plan X to
satisfy the actual contribution
percentage test, Plan X must distribute
1.25% or $2,500 of
D’s employee contributions and matching
contributions together with allocable
income. If
$2,500 in matching contributions and
allocable income is distributed, this
will correct the
excess aggregate contributions and will
not result in a discriminatory rate of
matching
contributions. See Example 8.
Example 3. (i) The facts are the same as
in Example 2, except that Employee D
also had elective contributions under
Plan Y, maintained by an employer
unrelated to M. In
January 2007, D requests and receives a
distribution of $1,200 in excess
deferrals from
Plan X. Pursuant to the terms of Plan X,
D forfeits the $600 match on the excess
deferrals
to correct a discriminatory rate of
match.
(ii) The $3,000 that would otherwise
have been recharacterized for Plan X to
satisfy
the actual deferral percentage test is
reduced by the $1,200 already
distributed as an
excess deferral, leaving $1,800 to be
recharacterized. See
§1.401(k)-2(b)(4)(i)(A). D’s
actual contribution ratio is now 4.35%
($7,500 in matching contributions plus
$1,800 in
recharacterized contributions less $600
forfeited matching contributions
attributable to the
excess deferrals, divided by $200,000 in
compensation).
(iii) The matching and employee
contributions for Employee D must be
reduced by
.35% of compensation in order to reduce
the ACP of the HCEs to 4%. The plan must
provide for forfeiture of additional
matching contributions to prevent a
discriminatory rate of
matching contributions. See Example 8.
Example 4. (i) The facts are the same as
in Example 3, except that D does not
request a distribution of excess
deferrals until March 2007. Employer X
has already
recharacterized $3,000 as employee
contributions.
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§1.402(g)-1(e)(6), the amount of excess
deferrals is reduced by the
amount of excess contributions that are
recharacterized. Because the amount
recharacterized is greater than the
excess deferrals, Plan X is neither
required nor
permitted to make a distribution of
excess deferrals, and the
recharacterization has
corrected the excess deferrals.
Example 5. (i) For the 2006 plan year,
Employee F defers $10,000 under Plan M
and $6,000 under Plan N. Plans M and N,
which have calendar plan years are
maintained
by unrelated employers. Plan M provides
a fully vested, 100% matching
contribution, does
not take elective contributions into
account under section 401(m) or take
matching
contributions into account under section
401(k) and provides that excess
contributions and
excess aggregate contributions are
corrected by distribution. Under Plan M,
Employee F
is allocated excess contributions of
$600 and excess aggregate contributions
of $1,600.
Employee F timely requests and receives
a distribution of the $1,000 excess
deferral from
Plan M and, pursuant to the terms of
Plan M, forfeits the corresponding
$1,000 matching
contribution.
(ii) No distribution is required or
permitted to correct the excess
contributions
because $1,000 has been distributed by
Plan M as excess deferrals. The
distribution
required to correct the excess aggregate
contributions (after forfeiting the
matching
contribution) is $600 ($1,600 in excess
aggregate contributions minus $1,000 in
forfeited
matching contributions). If Employee F
had corrected the excess deferrals of
$1,000 by
withdrawing $1,000 from Plan N, Plan M
would have had to correct the $600
excess
contributions in Plan M by distributing
$600. Since Employee F then would have
forfeited
$600 (instead of $1,000) in matching
contributions, Employee F would have had
$1,000
($1,600 in excess aggregate
contributions minus $600 in forfeited
matching contributions)
remaining of excess aggregate
contributions in Plan M. These would
have been corrected
by distributing an additional $1,000
from Plan M.
Example 6. (i) Employee G is the sole
highly compensated employee in a profit
sharing plan under which the employer
matches 100% of employee contributions
up to 2%
of compensation, and 50% of employee
contributions up to the next 4% of
compensation.
For the 2008 plan year, Employee G has
compensation of $100,000 and makes a 7%
employee contribution of $7,000.
Employee G receives a 4% matching
contribution or
$4,000. Thus, Employee G’s actual
contribution ratio (ACR) is 11%. The
actual
contribution percentage for the
nonhighly compensated employees is 5%,
and the
employer determines that Employee G’s
ACR must be reduced to 7% to comply with
the
rules of section 401(m).
(ii) In this case, the plan satisfies
the requirements of section if it
distributes the
unmatched employee contributions of
$1,000, and $2,000 of matched employee
contributions with their related matches
of $1,000. This would leave Employee G
with 4%
employee contributions, and 3% matching
contributions, for an ACR of 7%.
Alternatively,
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7.
Example 7. (i) Employee H is an HCE in
Employer X’s profit sharing plan, which
matches 100% of employee contributions
up to 5% of compensation. The matching
contribution is vested at the rate of
20% per year. In 2006, Employee H makes
$5,000 in
employee contributions and receives
$5,000 of matching contributions.
Employee H is
60% vested in the matching contributions
at the end of the 2006 plan year. In
February
2007, Employer X determines that
Employee H has excess aggregate
contributions of
$1,000. The plan provides that only
matching contributions will be
distributed as excess
aggregate contributions.
(ii) Employer X has two options
available in distributing Employee H’s
excess
contributions. The first option is to
distribute $600 of vested matching
contributions and
forfeit $400 of nonvested matching
contributions. These amounts are in
proportion to
Employee H’s vested and nonvested
interests in all matching contributions.
The second
option is to distribute $1,000 of vested
matching contributions, leaving the
nonvested
matching contributions in the plan.
(iii) If the second option is chosen,
the plan must also provide a separate
vesting
schedule for vesting these nonvested
matching contributions. This is
necessary because
the nonvested matching contributions
must vest as rapidly as they would have
had no
distribution been made. Thus, 50% must
vest in each of the next 2 years.
(iv) The plan will not satisfy the
nondiscriminatory availability
requirement of section
401(a)(4) if only nonvested matching
contributions are distributed because
the effect is that
matching contributions for HCEs vest
more rapidly than those for NHCEs. See
§1.401(m)-1(e)(4).
Example 8. (i) Employer Y maintains a
calendar year profit sharing plan that
includes a cash or deferred arrangement.
Elective contributions are matched at
the rate of
100%. After-tax employee contributions
are permitted under the plan only for
nonhighly
compensated employees and are matched at
the same rate. No employees make excess
deferrals. Employee J, a highly
compensated employee, makes an $8,000
elective
contribution and receives an $8,000
matching contribution.
(ii) Employer Y performs the actual
deferral percentage (ADP) and the actual
contribution percentage (ACP). To
correct failures of the ADP and ACP
tests, the plan
distributes to A $1,000 of excess
contributions and $500 of excess
aggregate
contributions. After the distributions,
Employee J’s contributions for the year
are $7,000 of
elective contributions and $7,500 of
matching contributions. As a result,
Employee J has
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7.
(c) Additional rules for prior year
testing method--(1) Rules for change in
testing
method. A plan is permitted to change
from the prior year testing method to
the current
year testing method for any plan year. A
plan is permitted to change from the
current year
testing method to the prior year testing
method only in situations described in
§1.401(k)2(
c)(1)(ii). For purposes of this
paragraph (c)(1), a plan that uses the
safe harbor method
described in §1.401(m)-3 or a SIMPLE
401(k) plan is treated as using the
current year
testing method for that plan year
(2) Calculation of ACP under the prior
year testing method for the first plan
year--(i)
Plans that are not successor plans. If,
for the first plan year of any plan
(other than a
successor plan), a plan uses the prior
year testing method, the plan is
permitted to use
either that first plan year as the
applicable year for determining the ACP
for the eligible
NHCEs, or 3% as the ACP for eligible
NHCEs, for applying the ACP test for
that first plan
year. A plan (other than a successor
plan) that uses the prior year testing
method but has
elected for its first plan year to use
that year as the applicable year for
determining the
ACP for the eligible NHCEs is not
treated as changing its testing method
in the second
plan year and is not subject to the
limitations on double counting under
paragraph (a)(6)(vi)
of this section for the second plan
year.
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plan year defined. For purposes of this
paragraph (c)(2), the first plan year
of any plan is the first year in which
the plan provides for employee
contributions or
matching contributions. Thus, the rules
of this paragraph (c)(2) do not apply to
a plan
(within the meaning of §1.410(b)-7) for
a plan year if for such plan year the
plan is
aggregated under §1.401(m)-1(b)(4) with
any other plan that provides for
employee or
matching contributions in the prior
year.
(iii) Plans that are successor plans. A
plan is a successor plan if 50% or more
of
the eligible employees for the first
plan year were eligible employees under
another plan
maintained by the employer in the prior
year that provides for employee
contributions or
matching contributions. If a plan that
is a successor plan uses the prior year
testing
method for its first plan year, the ACP
for the group of NHCEs for the
applicable year must
be determined under paragraph (c)(4) of
this section.
(3) Plans using different testing
methods for the ACP and ADP test. Except
as
otherwise provided in this paragraph
(c)(3), a plan may use the current year
testing method
or prior year testing method for the ACP
test for a plan year without regard to
whether the
current year testing method or prior
year testing method is used for the ADP
test for that
year. For example, a plan may use the
prior year testing method for the ACP
test and the
current year testing method for its ADP
test for the plan year. However, plans
that use
different testing methods under this
paragraph (c)(3) cannot use -(
i) The recharacterization method of
§1.401(k)-2(b)(3) to correct excess
contributions for a plan year;
(ii) The rules of paragraph (a)(6)(ii)
of this section to take elective
contributions into
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(iii) The rules of paragraph
§1.401(k)-2(a)(6) to take qualified
matching
contributions into account under the ADP
test (rather than the ACP test).
(4) Rules for plan coverage change--(i)
In general. A plan that uses the prior
year
testing method that experiences a plan
coverage change during a plan year
satisfies the
requirements of this section for that
year only if the plan provides that the
ACP for the
NHCEs for the plan year is the weighted
average of the ACPs for the prior year
subgroups.
(ii) Optional rule for minor plan
coverage changes. If a plan coverage
change
occurs and 90% or more of the total
number of the NHCEs from all prior year
subgroups
are from a single prior year subgroup,
then, in lieu of using the weighted
averages
described in paragraph (c)(4)(i) of this
section, the plan may provide that the
ACP for the
group of eligible NHCEs for the prior
year under the plan is the ACP of the
NHCEs for the
prior year of the plan under which that
single prior year subgroup was eligible.
(iii) Definitions. The following
definitions apply for purposes of this
paragraph
(c)(4)-(
A) Plan coverage change. The term plan
coverage change means a change in the
group or groups of eligible employees
under a plan on account of-(
1) The establishment or amendment of a
plan;
(2) A plan merger or spinoff under
section 414(l);
(3) A change in the way plans (within
the meaning of §1.410(b)-7) are combined
or
separated for purposes of
§1.401(m)-1(b)(4) (e.g., permissively
aggregating plans not
previously aggregated under
§1.410(b)-7(d), or ceasing to
permissively aggregate plans
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(4) A reclassification of a substantial
group of employees that has the same
effect
as amending the plan (e.g., a transfer
of a substantial group of employees from
one
division to another division); or
(5) A combination of any of paragraphs
(c)(4)(iii)(A)(1) through (4) of this
section.
(B) Prior year subgroup. The term prior
year subgroup means all NHCEs for the
prior plan year who, in the prior year,
were eligible employees under a specific
plan that
provides for employee contributions or
matching contributions maintained by the
employer
and who would have been eligible
employees in the prior year under the
plan being tested
if the plan coverage change had first
been effective as of the first day of
the prior plan year
instead of first being effective during
the plan year. The determination of
whether an
NHCE is a member of a prior year
subgroup is made without regard to
whether the NHCE
terminated employment during the prior
year.
(C) Weighted average of the ACPs for the
prior year subgroups. The term
weighted average of the ACPs for the
prior year subgroups means the sum, for
all prior
year subgroups, of the adjusted ACPs for
the plan year. The term adjusted ACP
with
respect to a prior year subgroup means
the ACP for the prior plan year of the
specific plan
under which the members of the prior
year subgroup were eligible employees on
the first
day of the prior plan year, multiplied
by a fraction, the numerator of which is
the number of
NHCEs in the prior year subgroup and
denominator of which is the total number
of NHCEs
in all prior year subgroups.
(iv) Example. The following example
illustrate the application of this
paragraph
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test. The example is as follows:
Example. (i) Employer B maintains two
plans, Plan N and Plan P, each of which
includes a provides for employee
contributions or matching contributions.
The plans were
not permissively aggregated under §
1.410(b)-7(d) for the 2005 testing year.
Both plans
use the prior year testing method. Plan
N had 300 eligible employees who were
NHCEs
for 2005, and their ACP for that year
was 6%. Plan P had 100 eligible
employees who
were NHCEs for 2005, and the ACP for
those NHCEs for that plan was 4%. Plan N
and
Plan P are permissively aggregated under
§ 1.410(b)-7(d) for the 2006 plan year.
(ii) The permissive aggregation of Plan
N and Plan P for the 2006 testing year
under § 1.410(b)-7(d) is a plan coverage
change that results in treating the
plans as one
plan (Plan NP). Therefore, the prior
year ACP for the NHCEs under Plan NP for
the 2006
testing year is the weighted average of
the ACPs for the prior year subgroups.
(iii) The first step in determining the
weighted average of the ACPs for the
prior
year subgroups is to identify the prior
year subgroups. With respect to the 2006
testing
year, an employee is a member of a prior
year subgroup if the employee was an
NHCE of
Employer B for the 2005 plan year, was
an eligible employee for the 2005 plan
year under
any section 401(k) plan maintained by
Employer B, and would have been an
eligible
employee in the 2005 plan year under
Plan NP if Plan N and Plan P had been
permissively
aggregated under §1.410(b)-7(d) for that
plan year. The NHCEs who were eligible
employees under separate plans for the
2005 plan year comprise separate prior
year
subgroups. Thus, there are two prior
year subgroups under Plan NP for the
2006 testing
year: the 300 NHCEs who were eligible
employees under Plan N for the 2005 plan
year
and the 100 NHCEs who were eligible
employees under Plan P for the 2005 plan
year.
(iv) The weighted average of the ACPs
for the prior year subgroups is the sum
of
the adjusted ACP with respect to the
prior year subgroup that consists of the
NHCEs who
were eligible employees under Plan N,
and the adjusted ACP with respect to the
prior year
subgroup that consists of the NHCEs who
were eligible employees under Plan P.
The
adjusted ACP for the prior year subgroup
that consists of the NHCEs who were
eligible
employees under Plan N is 4.5%,
calculated as follows: 6% (the ACP for
the NHCEs under
Plan N for the prior year) x 300/400
(the number of NHCEs in that prior year
subgroup
divided by the total number of NHCEs in
all prior year subgroups), which equals
4.5%. The
adjusted ACP for the prior year subgroup
that consists of the NHCEs who were
eligible
employees under Plan P is 1%, calculated
as follows: 4% (the ACP for the NHCEs
under
Plan P for the prior year) x 100/400
(the number of NHCEs in that prior year
subgroup
divided by the total number of NHCEs in
all prior year subgroups), which equals
1%. Thus,
the prior year ACP for NHCEs under Plan
NP for the 2006 testing year is 5.5%
(the sum of
adjusted ACPs for the prior year
subgroups, 4.5% plus 1%).
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(a) ACP test safe harbor. Matching
contributions under a plan satisfy the
ACP safe
harbor provisions of section 401(m)(11)
for a plan year if the plan satisfies
the safe harbor
contribution requirement of paragraphs
(b) or (c) of this section for the plan
year, the
limitations on matching contributions of
paragraph (d) of this section, the
notice
requirement of paragraph (e) of this
section, the plan year requirements of
paragraph (f) of
this section, and the additional rules
of paragraphs (g), (h) and (j) of this
section, as
applicable. Pursuant to section
401(k)(12)(E)(ii), the safe harbor
contribution requirement
of paragraphs (b) and (c) of this
section must be satisfied without regard
to section 401(l).
The contributions made under paragraphs
(b) and (c) of this section are referred
to as safe
harbor nonelective contributions and
safe harbor matching contributions,
respectively.
(b) Safe harbor nonelective contribution
requirement. A plan satisfies the safe
harbor nonelective contribution
requirement of this paragraph (b) if it
satisfies the safe
harbor nonelective contribution
requirement of §1.401(k)-3(b).
(c) Safe harbor matching contribution
requirement. A plan satisfies the safe
harbor
matching contribution requirement of
this paragraph (c) if it satisfies the
safe harbor
matching contribution requirement of
§1.401(k)-3(c).
(d) Limitation on contributions–(1)
General rule. A plan that provides for
matching
contributions meets the requirements of
this section only if it satisfies the
limitations on
contributions set forth in this
paragraph (d).
(2) Matching rate must not increase. A
plan that provides for matching
contributions
meets the requirements of this paragraph
(d) only if the ratio of matching
contributions on
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(3) Limit on matching contributions. A
plan that provides for matching
contributions
satisfies the requirements of this
section only if-(
i) Matching contributions are not made
with respect to elective deferrals or
employee contributions that exceed 6% of
the employee’s safe harbor compensation
(within the meaning of
§1.401(k)-3(b)(2)); and
(ii) Matching contributions that are
discretionary do not exceed 4% of the
employee’s safe harbor compensation.
(4) Limitation on rate of match. A plan
meets the requirements of this section
only if
the ratio of matching contributions on
behalf of an HCE to that HCE’s elective
deferrals or
employee contributions (or the sum of
elective deferrals and employee
contributions) for
that plan year is no greater than the
ratio of matching contributions to
elective deferrals or
employee contributions (or the sum of
elective deferrals and employee
contributions) that
would apply with respect to any NHCE for
whom the elective deferrals or employee
contributions (or the sum of elective
deferrals and employee contributions)
are the same
percentage of safe harbor compensation.
An employee is taken into account for
purposes
of this paragraph (d)(4) if the employee
is an eligible employee under the cash
or deferred
arrangement with respect to which the
contributions required by paragraph (b)
or (c) of this
section are being made for a plan year.
A plan will not fail to satisfy this
paragraph (d)(4)
merely because the plan provides that
matching contributions will be made
separately with
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(5) HCEs participating in multiple
plans. The rules of section 401(m)(2)(B)
and
§1.401(m)-2(a)(3)(ii) apply for purposes
of determining the rate of matching
contributions
under paragraph (d)(4) of this section.
However, a plan will not fail to satisfy
the safe
harbor matching contribution
requirements of this section merely
because an HCE
participates during the plan year in
more than one plan that provides for
matching
contributions, provided that -(
i) The HCE is not simultaneously an
eligible employee under two plans that
provide
for matching contributions maintained by
an employer for a plan year; and
(ii) The period used to determine
compensation for purposes of determining
matching contributions under each such
plan is limited to periods when the HCE
participated in the plan.
(6) Permissible restrictions on elective
deferrals by NHCEs--(i) General rule. A
plan does not satisfy the safe harbor
requirements of this section, if
elective deferrals or
employee contributions by NHCEs are
restricted, unless the restrictions are
permitted by
this paragraph (d)(6).
(ii) Restrictions on election periods. A
plan may limit the frequency and
duration of
periods in which eligible employees may
make or change contribution elections
under a
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(iii) Restrictions on amount of
contributions. A plan is permitted to
limit the amount
of contributions that may be made by an
eligible employee under a plan, provided
that
each NHCE who is an eligible employee is
permitted (unless the employee is
restricted
under paragraph (d)(6)(v) of this
section) to make contributions in an
amount that is at least
sufficient to receive the maximum amount
of matching contributions available
under the
plan for the plan year, and the employee
is permitted to elect any lesser amount
of
contributions. However, a plan may
require eligible employees to make
contribution
elections in whole percentages of
compensation or whole dollar amounts.
(iv) Restrictions on types of
compensation that may be deferred. A
plan may limit
the types of compensation that may be
deferred or contributed by an eligible
employee
under a plan, provided that each
eligible NHCE is permitted to make
contributions under a
definition of compensation that would be
a reasonable definition of compensation
within
the meaning of §1.414(s)-1(d)(2). Thus,
the definition of compensation from
which
contributions may be made is not
required to satisfy the
nondiscrimination requirement of
§1.414(s)-1(d)(3).
(v) Restrictions due to limitations
under the Internal Revenue Code. A plan
may limit
the amount of contributions made by an
eligible employee under a plan-(
A) Because of the limitations of section
402(g) or section 415; or
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on account of a hardship distribution,
an employee’s ability to make
contributions has been suspended for 6
months in accordance with
§1.401(k)-1(d)(3)(iv)(E).
(e) Notice requirement. A plan satisfies
the notice requirement of this paragraph
(e) if it satisfies the notice
requirement of §1.401(k)-3(d).
(f) Plan year requirement --(1) General
rule. Except as provided in this
paragraph
(f) or in paragraph (g) of this section,
a plan will fail to satisfy the
requirements of section
401(m)(11) and this section unless plan
provisions that satisfy the rules of
this section are
adopted before the first day of that
plan year and remain in effect for an
entire 12-month
plan year. Moreover, if, as described in
paragraph (j)(4) of this section, safe
harbor
matching or nonelective contributions
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