Cash Or
Deferred Arrangements
Section 401(k) of the Internal Revenue Code
Section
401(k)
(1) General Rule. A profit-sharing or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan shall not be considered as not
satisfying the requirements of subsection (a) merely because the plan includes a
qualified cash or deferred arrangement.
(2) Qualified Cash Or Deferred Arrangement. A qualified cash or deferred
arrangement is any arrangement which is part of a profit-sharing or stock bonus
plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets
the requirements of subsection (a)--
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(A) under which
a covered employee may elect to have the employer make payments as
contributions to a trust under the plan on behalf of the employee, or to
the employee directly in cash;
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(B) under which
amounts held by the trust which are attributable to employer contributions
made pursuant to the employee's election--
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(i) may not be
distributable to participants or other beneficiaries earlier than--
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(I) separation
from service, death, or disability,
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(II) an event
described in paragraph (10),
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(III) in the
case of a profit-sharing or stock bonus plan, the attainment of age
59-1/2, or
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(IV) in the
case of contributions to a profit-sharing or stock bonus plan to which
section 402(e)(3) applies, upon hardship of the employee, and 7
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(ii) will not
be distributable merely by reason of the completion of a stated period of
participation or the lapse of a fixed number of years.
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(C) which
provides that an employee's right to his accrued benefit derived from
employer contributions made to the trust pursuant to his election is
non-forfeitable, and
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(D) which
does not require, as a condition of participation in the arrangement,
that an employee complete a period of service with the employer (or
employers) maintaining the plan extending beyond the period permitted
under section 410(a)(1) (determined without regard to subparagraph (B)(i)
thereof):
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(3) Application Of Participation And Discrimination Standards.
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(A) A cash or
deferred arrangement shall not be treated as a qualified cash or deferred
arrangement unless--
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(i) those
employees eligible to benefit under the arrangement satisfy the provisions
of section 410(b)(1), and
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(ii) the
actual deferral percentage for eligible highly compensated employees (as
defined in paragraph (5)) for the plan year bears a relationship to the
actual deferral percentage for all other eligible employees for the
preceding plan year which meets either of the following tests:
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(I) The
actual deferral percentage for the group of eligible highly compensated
employees is not more than the actual deferral percentage of all other
eligible employees multiplied by 1.25.
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(II) The
excess of the actual deferral percentage for the group of eligible
highly compensated employees over that of all other eligible employees
is not more than 2 percentage points, and the actual deferral percentage
for the group of eligible highly compensated employees is not more than
the actual deferral percentage of all other eligible employees
multiplied by 2.
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If 2 or more
plans which include cash or deferred arrangements are considered as 1
plan for purposes of section 401(a)(4) or 410(b), the cash or deferred
arrangements included in such plans shall be treated as 1 arrangement
for purposes of this subparagraph.
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If any highly
compensated employee is a participant under 2 or more cash or deferred
arrangements of the employer, for purposes of determining the deferral
percentage with respect to such employee, all such cash or deferred
arrangements shall be treated as 1 cash or deferred arrangement. An
arrangement may apply clause (ii) by using the plan year rather than the
preceding plan year if the employer so elects, except that if such an
election is made, it may not be changed except as provided by the
Secretary.
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(B) For
purposes of subparagraph (A), the actual deferral percentage for a
specified group of employees for a plan year shall be the average of the
ratios (calculated separately for each employee in such group) of--
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(i) the amount
of employer contributions actually paid over to the trust on behalf of
each such employee for such plan year, to
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(ii) the
employee's compensation for such plan year.
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(C) A cash or
deferred arrangement shall be treated as meeting the requirements of
subsection (a)(4) with respect to contributions if the requirements of
subparagraph (A)(ii) are met.
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(D) For
purposes of subparagraph (B), the employer contributions on behalf of
any employee--
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(i) shall
include any employer contributions made pursuant to the employee's
election under paragraph (2), and
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(ii) under
such rules as the Secretary may prescribe, may, at the election of the
employer, include--
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(I) matching
contributions (as defined in 401(m)(4)(A)) which meet the requirements of
paragraph (2)(B) and (C), and
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(II)
qualified non-elective contributions (within the meaning of section
401(m)(4)(C)).
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(E) For
purposes of this paragraph, in the case of the first plan year of any
plan (other than a successor plan), the amount taken into account as the
actual deferral percentage of non-highly compensated employees for the
preceding plan year shall be--
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(ii) if the
employer makes an election under this subclause, the actual deferral
percentage of non-highly compensated employees determined for such first
plan year.
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(Caution:
Subparagraph (F) applies to plan years beginning after December 31, 1998.)
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(F) Special
Rule For Early Participation. If an employer elects to apply section
410(b)(4)(B) in determining whether a cash or deferred arrangement meets
the requirements of subparagraph (A)(i), the employer may, in
determining whether the arrangement meets the requirements of
subparagraph (A)(ii), exclude from consideration all eligible employees
(other than highly compensated employees) who have not met the minimum
age and service requirements of section 410(a)(1)(A).
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(4) Other Requirements.
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(A) Benefits
(Other Than Matching Contributions) Must Not Be Contingent On Election To
Defer. A cash or deferred arrangement of any employer shall not be treated
as a qualified cash or deferred arrangement if any other benefit is
conditioned (directly or indirectly) on the employee electing to have the
employer make or not make contributions under the arrangement in lieu of
receiving cash. The preceding sentence shall not apply to any matching
contribution (as defined in section 401(m)) made by reason of such an
election.
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(B)
Eligibility Of State And Local Governments And Tax- Exempt
Organizations.--
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(i) Tax-exempts
Eligible.--Except as provided in clause (ii), any organization exempt from
tax under this subtitle may include a qualified cash or deferred
arrangement as part of a plan maintained by it.
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(ii)
Governments Ineligible.--A cash or deferred arrangement shall not be
treated as a qualified cash or deferred arrangement if it is part of a
plan maintained by a State or local government or political subdivision
thereof, or any agency or instrumentality thereof. This clause shall not
apply to a rural cooperative plan or to a plan of an employer described
in clause (iii).
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(iii)
Treatment Of Indian Tribal Governments.--An employer which is an Indian
tribal government (as defined in section 7701(a) (40)), a subdivision of
an Indian tribal government (determined in accordance with section
7871(d)), an agency or instrumentality of an Indian tribal government or
subdivision thereof, or a corporation chartered under Federal, State, or
tribal law which is owned in whole or in part by any of the foregoing
may include a qualified cash or deferred arrangement as part of a plan
maintained by the employer.
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(C)
Coordination With Other Plans. Except as provided in section 401(m), any
employer contribution made pursuant to an employee's election under a
qualified cash or deferred arrangement shall not be taken into account
for purposes of determining whether any other plan meets the
requirements of section 401(a) or 410(b). This subparagraph shall not
apply for purposes of determining whether a plan meets the average
benefit requirement of section 410(b)(2)(A)(ii).
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(5)
Highly Compensated Employee.
For purposes of this subsection, the term "highly compensated
employee" has the meaning given such term by section 414(q).
(6) Pre-ERISA Money Purchase Plan. For purposes of this subsection, the
term "pre-ERISA money purchase plan" means a pension plan--
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(A) which is a
defined contribution plan (as defined in section 414(i)),
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(B) which was
in existence on June 27, 1974, and which, on such date, included a
salary reduction arrangement, and
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(C) under
which neither the employee contributions nor the employer contributions
may exceed the levels provided for by the contribution formula in effect
under the plan on such date.
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(7) Rural
Cooperative Plan.
For purposes of this subsection--
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(A) In General.
The term "rural cooperative plan" means any pension plan--
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(i) which is a
defined contribution plan (as defined in section 414(i)), and
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(ii) which is
established and maintained by a rural cooperative.
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(B) Rural
Cooperative Defined. For purposes of subparagraph (A), the term
"rural cooperative" means--
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(i) any
organization which--
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(I) is engaged
primarily in providing electric service on a mutual or cooperative basis,
or
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(II) is
engaged primarily in providing electric service to the public in its
area of service and which is exempt from tax under this subtitle or
which is a State or local government (or an agency or instrumentality
thereof), other than a municipality (or an agency or instrumentality
thereof),
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(ii) any
organization described in paragraph (4) or (6) of section 501(c) and at
least 80 percent of the members of which are organizations described in
clause (i),
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(iii) a
cooperative telephone company described in section 501(c)(12), and
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(iv) an
organization which is a national association of organizations described
in clause (i), (ii), or (iii).
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(C) Special
Rule For Certain Distributions.--A rural cooperative plan which includes
a qualified cash or deferred arrangement shall not be treated as
violating the requirements of section 401(a) or of paragraph (2) merely
by reason of a hardship distribution or a distribution to a participant
after attainment of age 59 1/2. For purposes of this section, the term
"hardship distribution"' means a distribution described in
paragraph (2)(B)(i)(IV) (without regard to the limitation of its
application to profit-sharing or stock bonus plans).
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(8) Arrangement Not
Disqualified If Excess Contributions Distributed.
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(A) In General.
A cash or deferred arrangement shall not be treated as failing to meet the
requirements of clause (ii) of paragraph (3)(A) for any plan year if,
before the close of the following plan year--
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(i) the amount
of the excess contributions for such plan year (and any income allocable
to such contributions) is distributed, or
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(ii) to the
extent provided in regulations, the employee elects to treat the amount
of the excess contributions as an amount distributed to the employee and
then contributed by the employee to the plan. Any distribution of excess
contributions (and income) may be made without regard to any other
provision of law.
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(B) Excess
Contributions. For purposes of subparagraph (A), the term "excess
contributions" means, with respect to any plan year, the excess of--
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(i) the
aggregate amount of employer contributions actually paid over to the trust
on behalf of highly compensated employees for such plan year, or
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(ii) the
maximum amount of such contributions permitted under the limitations of
clause (ii) of paragraph (3)(A) (determined by reducing contributions
made on behalf of highly compensated employees in order of the actual
deferral percentages beginning with the highest of such percentages).
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(C) Method Of
Distributing Excess Contributions. Any distribution of the excess
contributions for any plan year shall be made to highly compensated
employees on the basis of the amount of contributions by, or on behalf of,
each of such employees.
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(D)
Additional Tax Under Section 72(t) Not To Apply. No tax shall be imposed
under section 72(t) on any amount required to be distributed under this
paragraph.
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(E) Treatment
Of Matching Contributions Forfeited By Reason Of Excess Deferral Or
Contribution. For purposes of paragraph (2)(C), a matching contribution
(within the meaning of subsection (m)) shall not be treated as
forfeitable merely because such contribution is forfeitable if the
contribution to which the matching contribution relates is treated as an
excess contribution under subparagraph (B), an excess deferral under
section 402(g)(2)(A), or an excess aggregate contribution under section
401(m)(6)(B).
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(F) Cross
Reference. For excise tax on certain excess contributions, see section
4979.
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(9) Compensation. For purposes of this subsection, the term
"compensation" has the meaning given such term by section 414(s).
(10) Distributions Upon Termination Of Plan Or Disposition Of Assets Or
Subsidiary.
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(A) In General.
The following events are described in this paragraph:
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(i)
Termination. The termination of the plan without establishment or
maintenance of another defined contribution plan (other than an employee
stock ownership plan as defined in section 4975(e)(7)).
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(ii)
Disposition Of Assets. The disposition by a corporation of substantially
all of the assets (within the meaning of section 409(d)(2)) used by such
corporation in a trade or business of such corporation, but only with
respect to an employee who continues employment with the corporation
acquiring such assets.
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(iii)
Disposition Of Subsidiary. The disposition by a corporation of such
corporation's interest in a subsidiary (within the meaning of section
409(d)(3)), but only with respect to an employee who continues
employment with such subsidiary.
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(B)
Distributions Must Be Lump Sum Distributions.
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(i) In General.
An event shall not be treated as described in subparagraph (A) with
respect to any employee unless the employee receives a lump sum
distribution by reason of the event.
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Caution:
Clause (ii), as amended by Pub. L. 104-188, Sec. 1401(b)(6), is
effective for taxable years beginning after December 31, 1999. See Sec.
1401(c)(2) of Pub. L. 104-188, which sets out a transition rule. Before
amendment by Pub. L. 104-188, clause (ii) read as follows: (ii) Lump sum
distribution. For purposes of this subparagraph, the term "lump sum
distribution" has the meaning given such term by section 402(d)(2),
without regard to clauses (i), (ii), (iii), and (iv) of subparagraph
(A), subparagraph (B), or subparagraph (F) thereof.) 401(k)(10)(B).
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(ii)
Lump-sum Distribution. For purposes of this subparagraph, the term
"lump-sum distribution" has the meaning given such term by
section 402(e)(4)(D) (without regard to sub-clauses (I), (II), (III),
and (IV) of clause (i) thereof).
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(C)
Transferor Corporation Must Maintain Plan. An event shall not be treated
as described in clause (ii) or (iii) of subparagraph (A) unless the
transferor corporation continues to maintain the plan after the
disposition.
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(11) Adoption Of
Simple Plan To Meet Nondiscrimination Tests.
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(A) In General.
A cash or deferred arrangement maintained by an eligible employer shall be
treated as meeting the requirements of paragraph (3)(A)(ii) if such
arrangement meets--
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(i) the
contribution requirements of subparagraph (B),
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(ii) the
exclusive plan requirements of subparagraph (C), and
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(iii) the
vesting requirements of section 408(p)(3).
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(B)
Contribution Requirements.
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(i) In General.
The requirements of this subparagraph are met if, under the arrangement--
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(I) an employee
may elect to have the employer make elective contributions for the year on
behalf of the employee to a trust under the plan in an amount which is
expressed as a percentage of compensation of the employee but which in no
event exceeds $6,000,
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(II) the
employer is required to make a matching contribution to the trust for
the year in an amount equal to so much of the amount the employee elects
under subclause (I) as does not exceed 3 percent of compensation for the
year, and
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(III) no
other contributions may be made other than contributions described in
subclause (I) or (II).
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(ii) Employer
May Elect 2-percent Non-elective Contribution. An employer shall be
treated as meeting the requirements of clause (i)(II) for any year if,
in lieu of the contributions described in such clause, the employer
elects (pursuant to the terms of the arrangement) to make non-elective
contributions of 2 percent of compensation for each employee who is
eligible to participate in the arrangement and who has at least $5,000
of compensation from the employer for the year. If an employer makes an
election under this subparagraph for any year, the employer shall notify
employees of such election within a reasonable period of time before the
60th day before the beginning of such year.
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(C) Exclusive
Plan Requirement. The requirements of this subparagraph are met for any
year to which this paragraph applies if no contributions were made, or
benefits were accrued, for services during such year under any qualified
plan of the employer on behalf of any employee eligible to participate in
the cash or deferred arrangement, other than contributions described in
subparagraph (B).
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(D)
Definitions And Special Rule.
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(i) Definitions.
For purposes of this paragraph, any term used in this paragraph which is
also used in section 408(p) shall have the meaning given such term by such
section.
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(ii) Coordination
With Top-heavy Rules. A plan meeting the requirements of this paragraph
for any year shall not be treated as a top-heavy plan under section 416
for such year.
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(Caution:
Par. (12), which was added by Pub. L. 104-188, applies to years
beginning after December 31, 1998.)
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(12) Alternative
Methods Of Meeting Nondiscrimination Requirements.
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(A) In General.
A cash or deferred arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii) if such arrangement--
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(i) meets the
contribution requirements of subparagraph (B) or (C), and
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(ii) meets
the notice requirements of subparagraph (D).
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(B) Matching
Contributions.
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(i) In General.
The requirements of this subparagraph are met if, under the arrangement,
the employer makes matching contributions on behalf of each employee who
is not a highly compensated employee in an amount equal to--
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(I) 100
percent of the elective contributions of the employee to the extent such
elective contributions do not exceed 3 percent of the employee's
compensation, and
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(II) 50
percent of the elective contributions of the employee to the extent that
such elective contributions exceed 3 percent but do not exceed 5 percent
of the employee's compensation.
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(ii) |
Rate For Highly
Compensated Employees. The requirements of this subparagraph are not met
if, under the arrangement, the rate of matching contribution with respect
to any elective contribution of a highly compensated employee at any rate
of elective contribution is greater than that with respect to an employee
who is not a highly compensated employee.
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(iii) |
Alternative
Plan Designs. If the rate of any matching contribution with respect to
any rate of elective contribution is not equal to the percentage
required under clause (i), an arrangement shall not be treated as
failing to meet the requirements of clause (i) if--
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(I) the rate of
an employer's matching contribution does not increase as an employee's
rate of elective contributions increase, and
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(II) the
aggregate amount of matching contributions at such rate of elective
contribution is at least equal to the aggregate amount of matching
contributions which would be made if matching contributions were made on
the basis of the percentages described in clause (i).
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(C)
Non-elective Contributions. The requirements of this subparagraph are
met if, under the arrangement, the employer is required, without regard
to whether the employee makes an elective contribution or employee
contribution, to make a contribution to a defined contribution plan on
behalf of each employee who is not a highly compensated employee and who
is eligible to participate in the arrangement in an amount equal to at
least 3 percent of the employee's compensation.
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(D) Notice
Requirement. An arrangement meets the requirements of this paragraph if,
under the arrangement, each employee eligible to participate is, within
a reasonable period before any year, given written notice of the
employee's rights and obligations under the arrangement which--
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(i) is
sufficiently accurate and comprehensive to appraise the employee of such
rights and obligations, and
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(ii) is
written in a manner calculated to be understood by the average employee
eligible to participate.
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(i) Withdrawal
And Vesting Restrictions. An arrangement shall not be treated as meeting
the requirements of subparagraph (B) or (C) of this paragraph unless the
requirements of subparagraphs (B) and (C) of paragraph (2) are met with
respect to all employer contributions (including matching contributions)
taken into account in determining whether the requirements of
subparagraphs (B) and (C) of this paragraph are met.
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(ii) Social
Security And Similar Contributions Not Taken Into Account. An
arrangement shall not be treated as meeting the requirements of
subparagraph (B) or (C) unless such requirements are met without regard
to subsection (l), and, for purposes of subsection (l), employer
contributions under subparagraph (B) or (C) shall not be taken into
account.
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(F) Other
Plans. An arrangement shall be treated as meeting the requirements under
subparagraph (A)(i) if any other plan maintained by the employer meets
such requirements with respect to employees eligible under the
arrangement.
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Last updated: 03-04
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