Highlights of Final Regulations - Sec. 401(k) Plans; 401(k) Hardship Distributions - Final Regulations

By Collins, Adrian A.; Gevertzman, Paul | The CPA Journal, April 1992 | Go to article overview

Highlights of Final Regulations - Sec. 401(k) Plans; 401(k) Hardship Distributions - Final Regulations


Collins, Adrian A., Gevertzman, Paul, The CPA Journal


Final Treasury Regulations have been issued under IRC Sec. 401(k), applicable to cash or deferred arrangements (CODAs), employee or matching contributions, and employee elections. The regulations affect plans spanning the period from November 1981 through May 14,1990, and thereafter.

This summary indicates major plan features and topics affected by the final regulations, and indicates major changes from past practice.

There are 11 major topics covered by these final rules:

1. The $7,000 annual overall limit on pre-tax elective salary deferrals (adjusted to $8,475 for 1991) applies to any single participant in a single plan or in more than one plan of related or unrelated employees.

2. Parity under TEFRA requires that all elective salary deferral plans for partners be governed by Sec. 401(K) rules. A one-time irrevocable election under Sec. 401(c) may be allowed.

3. Aggregation rules are provided for employee stock ownership plans and for plans maintained by more than one employer and collectively bargained plans. Also, these rules conclude that "restructuring" mentioned in the proposed Reg. Sec. 1.401(a)(4)-9 on May 14,1990, is not appropriate.

4. Rules governing distributions are provided, including distributions upon plan termination and hardship distribution (see first article in this column), and treatment of the point at which default would be a "distribution."

5. Rules are provided on other benefits not contingent upon elective deferrals, such as nonqualified deferred compensation plan benefits.

6. Determination of excess contributions and excess aggregate contributions under the so-called "leveling method" is confirmed for both the Secs. 401(k) and 401(m) tests.

7. Methods of allocation of income to excess contributions, excess aggregate contributions, and excess deferrals, will not be limited, but any reasonable method otherwise used for allocating income to participants' accounts may be employed.

8. The period for determining participant compensation for purposes of both the ADP and ACP tests, may now be permanently limited to the portion of the plan year during which an employee is a plan participant.

9. The effective date of applying the actual deferral percentage and actual contribution percent to governmental plan that adopted a CODA before May 7, 1986, is finalized as taxable years beginning after December 31, 1986.

10. Correction of excess annual additions under Sec. 415 is now permitted where plans distributed elective contributions to correct excess annual additions resulting from a reasonable error.

11. Reduction of excess accrued benefits under a defined benefit plan to meet the Sec. 415(b) limit is now permitted without violating Sec. 411(d)(6) of the Code.

These final regulations are generally effective for plan years beginning after December 31, 1979, but there are several special effective date rules. …

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