[11530]
January 7, 2000
TO: PENSION MEMBERS No. 3-00
PENSION OPERATIONS ADVISORY COMMITTEE No. 2-00
RE: IRS RELEASES 401(K) SAFE HARBOR GUIDANCE
______________________________________________________________________________
The Internal Revenue Service has released additional guidance on safe harbors for satisfying the
nondiscrimination rules under Code sections 401(k) and 401(m) in Notice 2000-3. The guidance is
provided in Q&A form. Notice 2000-3 modifies Notice 98-52.
Notice 2000-3 modifies the current 401(k) safe harbor guidance as follows: (1) allows sponsors
of existing 401(k) plans to wait as late as December 1 of a calendar year to decide to adopt the 401(k)
safe harbor 3% employer nonelective contribution method for that calendar year; (2) permits 401(k) safe
harbor plans to match elective or employee contributions on the basis of compensation for a payroll
period, month or quarter; (3) provides an extended time (until May 1, 2000) for 401(k) plan sponsors
adopting the safe harbor methods for the first time in 2000 to provide the required safe harbor notice to
employees; (4) allows 401(k) safe harbor plans to require salary reduction elections to be made using
whole percentages of pay or whole dollar amounts; (5) permits plans sponsors to provide the 401(k) safe
harbor notice electronically and simplifies the notice requirement; (6) permits safe harbor plans to
provide matching contributions on an employee’s aggregate employee and elective contributions; (7)
clarifies that 401(k) safe harbor plans are permitted to apply a suspension, similar to a 12-month
suspension that may be applied to employee elective contributions after an in-service withdrawal, to
employee after-tax contributions; (8) permits plan sponsors using the 401(k) safe harbor matching
contribution method to exit the safe harbor prospectively during a plan year (and switch to ADP and
ACP nondiscrimination testing) if employees are notified beforehand; (9) clarifies the interaction
between the 401(k) safe harbors and the election to separately test otherwise excludable employees for
purposes of the section 410(b) minimum coverage requirements; and (10) clarifies how 401(k) safe
harbor rules apply in the case of a profit sharing plan to which a 401(k) feature is added for the first time
during a plan year.
In Notice 2000-3, the Service notes that because of the amendments made to sections 401(k),
401(m) and 414(q) by the Small Business Job Protection Act of 1996 and other legislation, certain
portions of sections 1.401(k)-1, 1.401(m)-1, 1.401(m)-2, and 1.414(q)-1T of the regulations no longer
reflect current law. However, these regulations will continue to apply to the extent that they are not
inconsistent with the Code, Notices 97-2, 97-45, 98-1, 98-52, this notice and any subsequent guidance.
In addition to requesting comments on the safe harbor provisions, the Service requests
comments on the following issues: (1) potential approaches for simplifying the limitation on the multiple
use test; and (2) potential approaches for applying section 414(q)’s highly compensated employee
definition and the section 401(k) and section 401(m) nondiscrimination requirements in mergers and
acquisitions. According to Notice 2000-3, further guidance in these areas will take the form of proposed
regulations. Comments are due by March 24, 2000.
A copy of Notice 2000-3 is attached.
Kathryn A. Ricard
Associate Counsel
Attachment
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