ICI Supports IRS Efforts to Simplify Rules Governing 401(k) Plans

Washington, DC, October 24, 2003 - The Institute supports efforts to simplify and consolidate the numerous and diverse rules governing 401(k) plans and recently commented on proposed regulations issued by the IRS seeking additional guidance on several issues.

Background
In July 2003, the IRS issued proposed regulations setting forth the requirements for cash or deferred arrangements and matching or employee contributions. The regulations were intended to restate and consolidate prior guidance on 401(k) plans, as well as reflect legislative changes.

The proposed regulations are comprehensive in scope and address numerous topics, including:

  • the general structural requirements of cash or deferred arrangements (CODAs);
  • the nondiscrimination requirements for 401(k) plans, including the actual deferral percentage (ADP) test and related correction methods;
  • matching and employee contribution requirements, including the actual contribution percentage (ACP) test and related correction methods;
  • the aggregation and disaggregation of 401(k) plans for nondiscrimination testing purposes; and
  • the requirements for SIMPLE 401(k) plans.

ICI Position
The Institute has long supported efforts to simplify the rules governing 401(k) plans. In its recent comment letter, the Institute states that the IRS's proposed regulations are an excellent and comprehensive restatement of the 401(k) plan rules, but notes that there are some issues raised by the proposed regulations where it would be helpful to receive additional clarification.

In particular, the Institute asks the IRS to:

  • clarify that the gap period only includes the date through which the amount of any excess contribution and earnings (or losses) is calculated, which includes a time delay for plans using daily valuations;
  • clarify whether 401(k) plans, including plans that do not contain an automatic enrollment feature, must provide notice at least annually to participants and to permit flexibility in complying with this new rule by allowing plans to provide the required notice electronically;
  • clarify that the automatic enrollment permitted by the proposed regulations includes automatic contributions of compensation increases and bonuses received after employment has begun;
  • amend the provision addressing the tax treatment of corrective distributions in the proposed regulations to use the same language as the corresponding provision of the existing regulations to more clearly and accurately reflect income;
  • clarify that a 401(k) plan has at least until the end of the 2½ month period immediately following the close of the plan year to incorporate amendments regarding ADP and ACP testing; and
  • permit 401(k) plans to use electronic media to provide notices and information to plan participants.

Related Links
Sections of this website are devoted to the Institute's efforts to ensure a legislative and regulatory environment that includes fair tax treatment of fund shares, and to simplify the rules governing retirement savings vehicles.

  

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