August 15, 1991
TO: PENSION MEMBERS NO. 31-91
RE: IRS RELEASES FINAL 401 REGULATIONS
__________________________________________________________
The Internal Revenue Service released today final
regulations relating to cash or deferred arrangements and
employee and matching contributions under employee plans. (See
Institute Memorandum to Pension Members No. 38-88, dated August
11, 1988.)
The final regulations address various issues raised by the
proposed regulations in 1988. For example, the regulations
clarify that 401(k) plans may be terminated and the assets rolled
over to a SEP without violating the prohibition on distributions
when the employer maintains a "successor plan." The regulations
also clarify the standards applicable to hardship distributions
and that defaulted plan loans need not be considered
"distributions" even though the loan is includible in a
participant's gross income.
The regulations provide for several alternatives in the
area of 401(k) plan discrimination testing and correction
procedures. Specifically, the regulations allow plans to use any
reasonable method to allocate income to excess contributions,
excess aggregate contributions and excess deferrals. Plans may
also apply the ADP or ACP tests using compensations received by
an employee while (i) eligible to participate in the 401(k) plan,
(ii) eligible to make employee contributions, (iii) eligible to
have matching contributions made on the employee's behalf or (iv)
employed for the year. The regulations also permit plans to
distribute elective contributions to correct excess annual
additions resulting from a reasonable error in determining the
amount of elective deferrals that a participant may make under
the limits of Code section 415.
A copy of the final regulations is attached. We will keep
you informed of developments.
W. Richard Mason
Assistant Counsel - Pension
Attachment