The third article in our series on the final 401(k) regulations focuses on the nondiscrimination rules applicable to CODAs and on the nonforfeitability of elective deferrals.
NONDISCRIMINATION RULES APPLICABLE TO CASH OR DEFERRED ARRANGEMENTS (CODAs)
Satisfying the ADP Test
If a CODA satisfies any of the following requirements, the requirements of Code Section 401(a)(4) with respect to nondiscrimination in plan contributions are met:
|
| |
– |
the 401(k) safe harbor provisions; or |
| |
– |
the SIMPLE 401(k) provisions. |
Note: a State or local government plan is deemed to satisfy the ADP test.
Benefits, Rights and Features
Each level of elective contributions to a CODA is a right or feature subject to 401(a)(4) nondiscrimination testing of “benefits, rights and features” The ability to make a Roth contribution (beginning in 2006) will also be a right or feature of a CODA subject to testing under the final regulations.
Anti-abusive practices provisions clarified
The IRS has taken the position that even if a 401(k) plan otherwise satisfies the ADP test, it might nonetheless be subject to disqualification if found to engage in “abusive practices”. The term was previously undefined. Guidance has been issued to indicate that repeated changes to the plan testing procedures or plan provisions that have the effect of distorting the ADP so as to increase it significantly, to inappropriately inflate the permitted ADP for HCEs, or, to otherwise manipulate, in any way, the nondiscrimination rules of section 401(k), if a principal purpose of the changes was to achieve the above results, will be deemed to be “abusive practices” and are not permitted.
McKay Hochman Commentary: The IRS is now explicitly targeting such abusive practices for audit examinations.
ELECTIVE CONTRIBUTIONS IMMEDIATELY NONFORFEITABLE
An employee’s elective deferral contributions are nonforfeitable and are immediately 100% vested. Thus, no age, service or vesting schedules may be applied to elective contributions.
The IRS included in Treasury Reg. §1.401(k)(c)(3)] an example of a stock bonus plan which includes a CODA arrangement and which has a provision which states that all employees participating in the plan have a nonforfeitable right to a percentage of their account balance derived from all contributions based on a five year graded vesting schedule. Such a provision would not satisfy the CODA requirements and make the plan a nonqualified CODA.
|
