IRS Issues Guidance on Catch-Up Contributions, Hardship Distribution Rules

Washington, DC, December 21, 2001 - The Internal Revenue Service has issued Notice 2002-4, which provides guidance on several provisions enacted by the “Economic Growth and Tax Relief Reconciliation Act of 2001” (EGTRRA). In particular, the notice provides transitional relief with respect to the universal availability requirement under the catch-up provisions of Code Section 414(v). The notice also provides guidance with regard to EGTRRA’s modifications to the safe harbor hardship distribution rules and the rules governing distributions made upon “severance from employment.”

Universal Availability Regarding Catch-up Contributions
Notice 2002-4 clarifies application of the universal availability requirement of Code Section 414(v)(4) for 2002 by providing that a plan otherwise permitted to accept catch-up contributions may do so—even though other plans maintained by the same employer do not yet permit catch-up contributions—so long as all such plans begin offering catch-up contributions no later than October 1, 2002.

Additionally, the notice clarifies the application of the universal availability requirement where one or more plans maintained by members of a controlled group are qualified under Puerto Rico law—which presently does not permit catch-up contributions. Specifically, until further guidance is issued, an applicable employer plan permitting catch-up contributions will not violate the universal availability requirement “solely because another applicable employer plan maintained by the employer that is qualified under Puerto Rico law does not provide for catch-up contributions.”

Elective Contributions Following Hardship Distributions
Notice 2002-4 also provides guidance regarding the amount of elective contributions that a 401(k) plan participant may make, beginning in 2002, if the participant took a hardship distribution in the prior year and the plan uses the safe harbor provisions of Regulations Section 1.401(k)-1(d)(2)(iv)(B). In this situation, a plan participant will no longer be required to reduce the amount of elective contributions permitted under Code Section 402(g) by the amount of the elective contributions made in the year of the hardship.

Distributions on Severance from Employment
Finally, Notice 2002-4 permits plan amendments made on or after January 1, 2002 to provide for distributions upon severance from employment under Code Section 401(k)(2)(B)(i)(I), as amended by EGTRRA, regardless of whether the severance from employment occurred before, on, or after January 1, 2002.