Final 401(k) Regulations
Final Internal Revenue Service
regulations apply to all Section 401(k) “cash or deferred” plans and require
compliance starting with the 2006 plan year (for calendar year plans, compliance
is required as of the plan year which began January 1, 2006). The final
regulations require certain mandatory changes and offer planning options.
The mandatory changes that will
require the amendment of Section 401(k) plan documents effective as of the 2006
plan year include:
- Annual nondiscrimination
testing can be performed on the basis of current year contributions or
contribution data from the prior year. Plan documents now must specify
which testing method applies and the choice can be changed only by
subsequent plan amendment.
- Allocations of employer
contributions made in order to satisfy nondiscrimination testing (qualified
nonelective contributions and qualified matching contributions) are subject
to new allocation rules which must be specified in the plan document.
- Corrective distributions of
excessive contributions to highly compensated employees made to meet
antidiscrimination tests now must include any earnings on such distributions
for the period from the end of the plan year until the distribution is made
if there is a plan valuation date that occurs during that “gap” period.
Accordingly, daily valuation plans will be required to include earnings with
any such distributions.
- Plans which avoid
nondiscrimination testing by providing additional employer “safe harbor”
contributions must formally commit to following the safe harbor procedures
and not choose each year whether to comply with the safe harbor rules or
revert to nondiscrimination testing.
The final regulations also
provide the following planning options:
- Events that permit hardship
distributions have been expanded to include funeral expenses for a
participant’s parent, spouse, child or dependent; medical expenses for a
non-custodial child; and repair costs for damage to a participant’s
principal residence that qualify as tax deductible casualty expenses.
Any or all of these events can be added to a plan’s definition of
financial “hardship.”
- Plans may provide an automatic
enrollment feature that provides for employee 401(k) participation at a
given contribution level unless the employee affirmatively elects a
different contribution level or elects not to contribute at all.
Unlike the automatic enrollment feature provided under the recently passed
Pension Protection Act of 2006, this automatic enrollment provision is
currently available and it does not require additional employer
contributions.
- Plans may provide participants
a one-time irrevocable election not to participate in the plan.
Plan sponsors who are interested
in any of the optional plan provisions should consider including them in an
amendment incorporating the mandatory provisions of the final Section 401(k)
regulations. Those amendments should be completed and formally adopted by
no later than the end of the 2006 plan year, or December 31, 2006 for calendar
year plans.
Andrew S. Williams
Aronberg Goldgehn Davis & Garmisa
One IBM Plaza, Suite 3000
Chicago, Illinois 60611
312/755-3145
awilliams@agdglaw.com
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