Final 401(k) Regulations — Part 2 |
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March 3, 2005 |
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The second article in our series on the final 401(k) regulations focuses on the rules regarding qualified CODAs (cash or deferred arrangements). |
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The IRS Rules Relating to Qualified CODAs |
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Elective contributions under a qualified CODA are: |
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| - | treated as employer contributions for purposes of the Internal Revenue Code. |
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| - | generally are not included in the employee’s gross income at the time the cash would have been received (but for the cash or deferred election) or at the time contributed to the plan. |
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| Elective contributions under a qualified CODA will be included in the employee’s gross income if: | ||
| - | the contributions exceed the section 402(g) annual limit for a year, |
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| - | they are designated as after-tax Roth contributions (under section 402A after Dec. 31, 2005), or |
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| - | they are recharacterized as after-tax contributions to correct an ADP test failure. |
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| A CODA must provide for an election between contributions to the plan or payments directly in cash. A CODA must be part of either: |
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| - | a profit sharing plan, |
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| - | a stock bonus plan, |
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| - | a pre-ERISA money purchase plan, or |
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| - | a rural cooperative plan. |
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| A CODA must meet all of the following requirements to be a qualified CODA: | ||
| 1) | the elective contributions under the CODA must satisfy either the ADP test or one of the design-based alternatives such as the SIMPLE 401(k) Plan (section 401(k)(11) or the Safe Harbor 401(k) Plan ( section 401(k)(12)); | |
| 2) | elective contributions under a CODA must be nonforfeitable; | |
| 3) | distribution restrictions must apply to elective contributions, events allowing distribution are: | |
| - | the attainment of age 59 1/2 , | |
| - | hardship, | |
| - | death, | |
| - | disability, | |
| - | severance from employment, or | |
| - | plan termination; | |
| 4) | the group of employees eligible to participate in the CODA must satisfy coverage requirements (section 410(b)(1)); | |
| 5) | other than matching contributions (and certain other specified benefits) no other benefit may be conditioned, directly or indirectly, upon the employee’s making or not making elective contributions under the CODA; and | |
| 6) | not more than 1 year of service may be required of an employee for eligibility to make a cash or deferred election to the plan. |
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Plans sponsored by Indian tribal governments (after 1996) and rural cooperatives are allowed to include a qualified CODA. |
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