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Final IRS Regulations Intended to Simplify 401(k) Plan Rules
Washington, DC, December 31, 2004 - The Internal Revenue Service (IRS) has issued final regulations governing cash or deferred arrangements in 401(k) plans and matching or employee contributions that are intended to consolidate and simplify previous 401(k) plan guidance, as well as reflect legislative changes.
In July 2003, the IRS proposed regulations that addressed numerous 401(k) plan issues, including the general structural requirements of cash or deferred arrangements (CODAs); nondiscrimination requirements for 401(k) plans; matching and employee contribution requirements; and the requirements for SIMPLE 401(k) plans.
The final regulations adopted by the IRS reflect a number of substantive changes and clarifications to previously issued guidance and include suggestions made by the Institute on the regulations proposed in 2003.
Among other things, the final regulations:
- permit an employer to contribute increases in compensation or bonuses on an employee’s behalf to a trust, provided that the employee has an opportunity to elect to receive that amount in cash;
- provide administrative relief for plans that invest in mutual funds, which use daily valuations;
- correct a discrepancy between the language of previous regulations and the proposed regulations relating to the tax treatment of corrective distributions;
- retain a new requirement from the proposed regulations that restricts the use of the “bottom-up leveling” correction approach to satisfy the ADP test; and
- state that employers may use electronic notices and other types of communication to provide plan participants with the written notice of the employee’s rights and obligations under the plan.
The final regulations apply for plan years beginning on or after January 1, 2006. However, plan sponsors are permitted to apply the regulations to any plan year that ends after December 29, 2004, provided that the plan applies all the rules of the final regulations.
In an October 2003 comment letter on the proposed regulations, the Institute stated its long support for efforts to simplify the rules governing 401(k) plans. The Institute called the proposed regulations an “excellent and comprehensive restatement” of the 401(k) plan rules.