Notice 98-52

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Part III. Administrative, Procedural, and Miscellaneous
Cash or Deferred Arrangements;
Nondiscrimination
Notice 98–52
I. PURPOSE
This notice provides guidance on the
design-based alternative or “safe harbor”
methods in § 401(k)(12) and § 401(m)(11)
of the Internal Revenue Code for satisfying the § 401(k) and § 401(m) nondiscrimination tests.
Specifically, under this notice:
• A section 401(k) plan generally satisfies
the actual deferral percentage (“ADP”)
test if a prescribed level of safe harbor
matching or nonelective contributions
are made on behalf of all eligible nonhighly compensated employees
(“NHCEs”) and if employees are provided a timely notice describing their
rights and obligations under the plan.
See section V.
• Employee notices for the 1999 plan
year are not required to be provided before March 1, 1999. See the transition
rule in section V.C.2.
• A plan that satisfies the ADP test safe
harbor by providing a basic level of safe
harbor matching contributions automatically satisfies the actual contribution
percentage (“ACP”) test with respect to
matching contributions. Plans that provide additional matching contributions
satisfy the ACP test if matching contributions do not exceed specified limitations. See section VI.
• A special rule allows § 403(b) plans to
take advantage of the ACP test safe harbor. See section VI.C.
• Plan amendments needed to implement
the safe harbor methods generally may
be deferred until the date other SBJPA
plan amendments are required (for calendar year plans, December 31, 1999).
See section XI.
Among other matters, this notice also
addresses the timing of safe harbor contributions (section VII), the interaction of
the safe harbor methods with other qualification rules and testing methods (section
VIII), and how the safe harbor methods
work where an employer maintains multiple CODAs or plans (section IX).

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II. BACKGROUND
Section 1433(a) of the Small Business
Job Protection Act of 1996 (“SBJPA”),
Pub. L. 104–188, added new §§ 401(k)(12) and 401(m)(11) to the Code, effective
for plan years beginning after December
31, 1998, which provide design-based safe
harbor methods for satisfying the ADP test
contained in § 401(k)(3)(A)(ii) and the
ACP test contained in § 401(m)(2). Section 401(k)(12) provides that a cash or deferred arrangement (“CODA”) is treated
as satisfying the ADP test if the CODA
meets certain contribution and notice requirements. Section 401(m)(11) provides
that a defined contribution plan is treated
as satisfying the ACP test with respect to
matching contributions if the plan meets
the contribution and notice requirements
contained in § 401(k)(12) and, in addition, meets certain limitations on the
amount and rate of matching contributions available under the plan.
Previous guidance on other SBJPA
amendments to §§ 401(k) and 401(m) was
provided in Notice 97–2, 1997–1 C.B.
348, and Notice 98–1, 1998–3 I.R.B. 42.
III. EFFECT ON REGULATIONS
Because of the amendments made to
§§ 401(k) and 401(m) by SBJPA, as well
as by other recent legislation, certain portions of §§ 1.401(k)–1, 1.401(m)–1 and
1.401(m)–2 of the Income Tax Regulations no longer reflect current law. However, these regulations continue to apply
to the extent they are not inconsistent with
the Code, Notices 97–2 and 98–1, this notice, and any subsequent guidance.
IV. DEFINITIONS
A. In General
Except as provided in this section IV,
any term used in this notice that is defined
in Notice 98–1 or the regulations under
§§ 401(k) and 401(m) has the same meaning as in Notice 98–1 or those regulations.
For example, the definition of “plan” in
§ 1.401(k)–1(g)(11) applies for purposes
of this notice.
B. Compensation
Except as provided in section
V.B.1.c.iii, “compensation” for purposes

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of this notice means compensation as defined in § 1.401(k)–1(g)(2) (which incorporates by reference the definition of compensation in § 414(s) and § 1.414(s)–1);
provided, however, that the rule in the last
sentence of § 1.414(s)–1(d)(2)(iii) (which
generally permits a definition of compensation to exclude all compensation in excess of a specified dollar amount) does not
apply in determining the compensation of
NHCEs. The annual compensation limit
under § 401(a)(17) applies for purposes of
the safe harbor methods.
Thus, a uniform definition of compensation described in this section IV.B must
be used for purposes of the basic matching
formula or an enhanced matching formula
under section V.B.1.a, the nonelective
contribution requirement under section
V.B.2, and the matching contribution limitations under section VI.B. As provided
under § 1.401(k)–1(g)(2), an employer
may limit the period used to determine
compensation for a plan year to that portion of the plan year in which the employee is an eligible employee, provided
that this limit is applied uniformly to all
eligible employees under the plan for the
plan year.
C. Basic Matching Formula
For purposes of this notice, the “basic
matching formula” is the formula described in section V.B.1.a.i.
D. Enhanced Matching Formula
For purposes of this notice, an “enhanced matching formula” is a formula
described section V.B.1.a.ii.
E. Rate of Elective Contributions
For purposes of this notice, an employee’s “rate of elective contributions”
means the ratio of an employee’s elective
contributions under the plan for a plan
year to the employee’s compensation for
that plan year.
F. Rate of Employee Contributions
For purposes of this notice, an employee’s “rate of employee contributions”
means the ratio of an employee’s employee contributions under the plan for a
plan year to the employee’s compensation
for that plan year.

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G. Rate of Matching Contributions
For purposes of the ADP test safe harbor under section V, a “rate of matching
contributions” means the ratio of matching contributions on behalf of an employee under the plan for a plan year to
the employee’s elective contributions for
that plan year. For purposes of the ACP
test safe harbor under section VI, a “rate
of matching contributions” means the
ratio of matching contributions on behalf
of an employee under the plan for a plan
year to the employee’s respective employee contributions or elective contributions for that plan year.
H. Safe Harbor Matching Contributions and Safe Harbor Nonelective
Contributions
For purposes of this notice, safe harbor
matching contributions and safe harbor
nonelective contributions are matching
and nonelective contributions, respectively, that (1) are nonforfeitable within
the meaning of § 1.401(k)–1(c), (2) are
subject to the withdrawal restrictions of
§ 401(k)(2)(B) and § 1.401(k)–1(d), and
(3) are used to satisfy the safe harbor contribution requirement of section V.B. Accordingly, pursuant to § 401(k)(2)(B) and
§ 1.401(k)–1(d), such contributions (and
earnings thereon) must not be distributable
earlier than separation from service, death,
disability, an event described in
§ 401(k)(10), or, in the case of a profitsharing or stock bonus plan, the attainment of age 591⁄2. Pursuant to § 401(k)(2)(B) and § 1.401(k)-1(d)(2)(ii), hardship
is not a distributable event for contributions other than elective contributions.
V. ADP TEST SAFE HARBOR
A. General Rule
A CODA is treated as satisfying the
ADP test under § 401(k)(3)(A)(ii) and
§ 1.401(k)–1(b)(2) for a plan year if, for
the entire plan year, the arrangement satisfies the safe harbor contribution requirement of subsection B of this section V and
the notice requirement of subsection C of
this section V.
B. Safe Harbor Contribution
Requirement
The safe harbor contribution requirement of this section V.B is satisfied for a
plan year if the plan satisfies either (1) the

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matching contribution requirement of
paragraph 1 of this section V.B or (2) the
nonelective contribution requirement of
paragraph 2 of this section V.B. Pursuant
to § 401(k)(12)(E)(ii), the safe harbor
contribution requirement of this section
V.B must be satisfied without regard to
§ 401(l).
1. Matching Contribution
Requirement
a. In General
The matching contribution requirement
of this section V.B.1 is satisfied if, under
the terms of the plan, safe harbor matching contributions under either the basic
matching formula or an enhanced matching formula described below are required
to be made on behalf of each NHCE who
is an eligible employee.
i. Basic Matching Formula
The basic matching formula provides
matching contributions on behalf of each
NHCE who is an eligible employee in an
amount equal to (A) 100 percent of the
amount of the employee’s elective contributions that do not exceed 3 percent of the
employee’s compensation and (B) 50 percent of the amount of the employee’s
elective contributions that exceed 3 percent of the employee’s compensation but
that do not exceed 5 percent of the employee’s compensation.
ii. Enhanced Matching Formula
An enhanced matching formula provides matching contributions on behalf of
each NHCE who is an eligible employee
under a formula that, at any rate of elective contributions, provides an aggregate
amount of matching contributions at least
equal to the aggregate amount of matching
contributions that would have been provided under the basic matching formula.
In addition, under an enhanced matching
formula, the rate of matching contributions may not increase as an employee’s
rate of elective contributions increases.
b. Limitation on Matching
Contributions for HCEs
The matching contribution requirement
of this section V.B.1 is not satisfied if, at
any rate of elective contributions, the rate
of matching contributions that would
apply with respect to any highly compen-

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sated employee (“HCE”) who is an eligible employee is greater than the rate of
matching contributions that would apply
with respect to any NHCE who is an eligible employee and who has the same rate
of elective contributions.
c. Permissible Restrictions on
Elective Contributions by
NHCEs
The matching contribution requirement
of this section V.B.1 is not satisfied if
elective contributions by NHCEs are restricted, unless the restrictions are permitted as described below.
i. Restrictions on Election Periods
A plan sponsor may limit the frequency
and duration of periods in which eligible
employees may make or change cash or
deferred elections under a plan, provided
that, after receipt of the notice described
in subsection C of this section V, an employee has a reasonable opportunity (including a reasonable period) to make or
change a cash or deferred election for the
plan year. For purposes of the preceding
sentence, a 30-day period is deemed to be
a reasonable period.
ii. Restrictions on Amount of
Elective Contributions
A plan sponsor may limit the amount of
elective contributions that may be made
by an eligible employee under a plan, provided that each NHCE who is an eligible
employee is permitted (unless the employee is restricted under paragraph 1.c.iv
of this section V.B) to make elective contributions in an amount that is at least sufficient to receive the maximum amount of
matching contributions available under
the plan for the plan year, and the employee is permitted to elect any lesser
amount of elective contributions.
iii. Restrictions on Types of
Compensation That May be
Deferred
A plan sponsor may limit the types of
compensation that may be deferred by an
eligible employee under a plan, provided
that each NHCE who is an eligible employee is permitted to make elective contributions under a definition of compensation that would be a reasonable definition
of compensation within the meaning of
§ 1.414(s)–1(d)(2). (Thus, the definition

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is not required to satisfy the nondiscrimination requirement of § 1.414(s)-1(d)(3).)
However, see section IV.B regarding the
definition of compensation for purposes
of the basic matching formula or an enhanced matching formula under paragraph 1.a of this section V.B, the nonelective contribution requirement under
paragraph 2 of this section V.B, and the
matching contribution limitations under
section VI.B.
iv. Restrictions Due to Limitations
under the Code
A plan sponsor may limit the amount of
elective contributions made by an eligible
employee under a plan (A) because of the
limitations under § 402(g) or § 415 or (B)
because, on account of a hardship distribution, an employee’s ability to make elective contributions has been suspended for
12 months in accordance with § 1.401(k)–
1(d)(2)(iv)(B)(4) or limited in accordance
with § 1.401(k)–1(d)(2)(iv)(B)(3).
2. Nonelective Contribution
Requirement
The nonelective contribution requirement of this section V.B.2 is satisfied if,
under the terms of the plan, the employer
is required to make a safe harbor nonelective contribution on behalf of each NHCE
who is an eligible employee equal to at
least 3 percent of the employee’s compensation.
3. Examples
The safe harbor contribution requirement of this section V.B is illustrated by
the following examples:
Example 1
(a) Beginning January 1, 1999, Employer A maintains Plan L covering employees (including HCEs and NHCEs) in
Divisions D and E. Plan L contains a
CODA and provides a required matching
contribution equal to 100 percent of each
eligible employee’s elective contributions
up to 4 percent of compensation. For purposes of the matching contribution formula, compensation is defined as all compensation within the meaning of
§ 415(c)(3) (a definition that satisfies
§ 414(s)). Also, each employee is permitted to make elective contributions from
all compensation within the meaning of

November 16, 1998

§ 415(c)(3) and may change a cash or deferred election at any time. Plan L limits
the amount of an employee’s elective contributions for purposes of § 402(g) and
§ 415, and, in the case of a hardship distribution, suspends an employee’s ability to
make elective contributions for 12 months
in accordance with § 1.401(k)–1(d)(2)(iv)(B)(4) and limits an employee’s elective contributions in accordance with
§ 1.401(k)–1(d)(2)(iv)(B)(3). All contributions under Plan L are nonforfeitable
and are subject to the withdrawal restrictions of § 401(k)(2)(B). Plan L provides
for no other contributions and Employer
A maintains no other plans. Plan L is
maintained on a calendar-year basis and
all contributions for a plan year are made
within 12 months after the end of the plan
year.
(b) Based on these facts, matching
contributions under Plan L are safe harbor
matching contributions because they are
nonforfeitable, are subject to the withdrawal restrictions of § 401(k)(2)(B), and
are used to satisfy the safe harbor contribution requirement of section V.B.
(c) Plan L’s formula is an enhanced
matching formula because each NHCE
who is an eligible employee receives
matching contributions at a rate that, at
any rate of elective contributions, provides an aggregate amount of matching
contributions at least equal to the aggregate amount of matching contributions
that would have been received under the
basic matching formula, and the rate of
matching contributions does not increase
as the rate of an employee’s elective contributions increases.
(d) Plan L satisfies the safe harbor contribution requirement of this section V.B
because safe harbor matching contributions under an enhanced matching formula are required to be made on behalf of
each NHCE who is an eligible employee.
(e) Plan L would satisfy the ADP test
safe harbor if Plan L also satisfied the notice requirement of subsection C of this
section V. (Plan L then would also satisfy
the ACP test safe harbor. See section VI.)
Example 2
(a) The facts are the same as in Example 1, except that instead of providing a
required matching contribution equal to
100 percent of each eligible employee’s
elective contributions up to 4 percent of

18

compensation, Plan L provides a matching contribution equal to 150 percent of
each eligible employee’s elective contributions up to 3 percent of compensation.
(b) Plan L’s formula is an enhanced
matching formula and Plan L satisfies the
safe harbor contribution requirement of
this section V.B.
(c) Plan L would satisfy the ADP test
safe harbor if Plan L also satisfied the notice requirement of subsection C of this
section V. (Plan L then would also satisfy
the ACP test safe harbor. See section VI.)
Example 3
(a) The facts are the same as in Example 1, except that instead of permitting
each employee to make elective contributions from compensation within the
meaning of § 415(c)(3), each employee’s
elective contributions under Plan L are
limited to 15 percent of the employee’s
“basic compensation.” Basic compensation is defined under Plan L as compensation within the meaning of § 415(c)(3),
but excluding overtime pay.
(b) The definition of basic compensation under Plan L is a reasonable definition of compensation within the meaning
of § 1.414(s)–1(d)(2).
(c) Plan L will not fail to satisfy the
safe harbor contribution requirement of
this section V.B merely because Plan L
limits the amount of elective contributions and the types of compensation that
may be deferred by eligible employees,
provided that each NHCE who is an eligible employee may make elective contributions equal to at least 4 percent of the
employee’s compensation under
§ 415(c)(3) (that is, the amount of elective
contributions that is sufficient to receive
the maximum amount of matching contributions available under the plan).
Example 4
(a) The facts are the same as in Example 1, except that Plan L provides that
only employees employed on the last day
of the plan year will receive a safe harbor
matching contribution.
(b) Even if the section 401(m) plan satisfies the minimum coverage requirements of § 410(b)(1) taking into account
this last-day requirement, Plan L would
not satisfy the safe harbor contribution requirement of this section V.B because safe

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harbor matching contributions are not
made on behalf of all NHCEs who are eligible employees and who make elective
contributions.
(c) The result would be the same if, instead of providing safe harbor matching
contributions under an enhanced formula,
Plan L provides for a 3-percent safe harbor nonelective contribution that is restricted to eligible employees under the
CODA who are employed on the last day
of the plan year.
Example 5
(a) The facts are the same as in Example 1, except that instead of providing
safe harbor matching contributions under
the enhanced matching formula to employees in both Divisions D and E, employees in Division E are provided safe
harbor matching contributions under the
basic matching formula, while matching
contributions continue to be provided to
employees in Division D under the enhanced matching formula.
(b)
Even if Plan L satisfies
§ 1.401(a)(4)–4 with respect to each rate
of matching contributions available to employees under the plan, the plan would fail
to satisfy the safe harbor contribution requirement of this section V.B because the
rate of matching contributions with respect to HCEs in Division D at a rate of
elective contributions between 3 and 5
percent would be greater than that with respect to NHCEs in Division E at the same
rate of elective contributions. For example, an HCE in Division D who would
have a 4-percent rate of elective contributions would have a rate of matching contributions of 100 percent while an NHCE
in Division E who would have the same
rate of elective contributions would have a
lower rate of matching contributions.
C. Notice Requirement
The notice requirement of this section
V.C is satisfied if each eligible employee
for the plan year is given written notice of
the employee’s rights and obligations
under the plan and the notice satisfies the
content requirement of paragraph 1 of this
section V.C and the timing requirement of
paragraph 2 of this section V.C.
1. Content Requirement
a. General Rule
The content requirement of this section

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V.C.1 is satisfied if the notice (1) is sufficiently accurate and comprehensive to inform the employee of the employee’s
rights and obligations under the plan and
(2) is written in a manner calculated to be
understood by the average employee eligible to participate in the plan. For purposes of the preceding sentence, a notice
is not considered sufficiently accurate and
comprehensive unless the notice accurately describes (i) the safe harbor matching or nonelective contribution formula
used under the plan (including a description of the levels of matching contributions, if any, available under the plan); (ii)
any other contributions under the plan (including the potential for discretionary
matching contributions) and the conditions under which such contributions are
made; (iii) the plan to which safe harbor
contributions will be made (if different
than the plan containing the CODA); (iv)
the type and amount of compensation that
may be deferred under the plan; (v) how
to make cash or deferred elections, including any administrative requirements
that apply to such elections; (vi) the periods available under the plan for making
cash or deferred elections; and (vii) withdrawal and vesting provisions applicable
to contributions under the plan.
b. 1999 Transition Relief for Content Requirement
For a plan adopting the safe harbor provisions for a plan year that begins before
January 1, 2000, a notice will not fail to
satisfy the content requirement for that
plan year merely because the notice does
not include all of the items listed in paragraph 1.a of this section V.C, provided
that the notice satisfies a reasonable good
faith interpretation of the notice requirements under §§ 401(k)(12) and
401(m)(11).
2. Timing Requirement
a. General rule
The timing requirement of this section
V.C.2 is satisfied if the notice is provided
within a reasonable period before the beginning of the plan year (or, in the year an
employee becomes eligible, within a reasonable period before the employee becomes eligible). The determination of
whether a notice satisfies the timing requirement of this section V.C.2 is based

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on all of the relevant facts and circumstances.
b. Deemed Satisfaction of Timing
Requirement
The timing requirement of this section
V.C.2 is deemed to be satisfied if at least
30 days (and no more than 90 days) before the beginning of each plan year, the
notice is given to each eligible employee
for the plan year. In the case of an employee who does not receive the notice
within the period described in the previous sentence because the employee becomes eligible after the 90th day before
the beginning of the plan year, the timing
requirement is deemed to be satisfied if
the notice is provided no more than 90
days before the employee becomes eligible (and no later than the date the employee becomes eligible). Thus, for example, the preceding sentence would
apply in the case of any employee eligible
for the first plan year under a newly established section 401(k) plan, or would apply
in the case of the first plan year in which
an employee becomes eligible under an
existing section 401(k) plan.
c. 1999 Transition Relief for Timing
Requirement
For a plan year that begins on or before
April 1, 1999, the notice described in this
section V.C satisfies the timing requirement for that plan year (with respect to an
existing section 401(k) plan or a newly
established one) if the notice is given on
or before March 1, 1999. However, in
order to satisfy the ADP or ACP test safe
harbor for the plan year, a plan that is
using the transition relief provided under
this section V.C.2.c still must satisfy the
otherwise applicable requirements of this
Notice 98-52 with respect to the entire
plan year.
VI. ACP TEST SAFE HARBOR
A. General Rule
A defined contribution plan is treated
as satisfying the ACP test under §
401(m)(2) and § 1.401(m)-1(b) with respect to matching contributions for a plan
year if, for the entire plan year, (i) each
NHCE eligible to receive an allocation of
matching contributions under the plan is
also an eligible employee under a CODA
that satisfies the ADP test safe harbor of

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section V and (ii) the plan satisfies the
matching contribution limitations of subsection B of this section VI. See section
VIII.F.1 regarding the continued application of the ACP test to employee contributions.
B. Matching Contribution Limitations
1. Harbor Matching Contributions
Under Basic Matching Formula
A plan satisfies the matching contribution limitations of this section VI.B if (i)
the plan satisfies the matching contribution requirement of section V.B.1 using
the basic matching formula and (ii) no
other matching contributions are provided
under the plan.
2. Safe Harbor Matching Contributions Under an Enhanced Matching Formula
A plan satisfies the matching contribution limitations of this section VI.B if (i)
the plan satisfies the matching contribution requirement of section V.B.1 using an
enhanced matching formula under which
matching contributions are only made
with respect to elective contributions that
do not exceed 6 percent of the employee’s
compensation and (ii) no other matching
contributions are provided under the plan.
3. Other Matching Contributions
In the case of any other plan, the
matching contribution limitations of this
section VI.B are satisfied if, under the
plan, (i) matching contributions are not
made with respect to employee contributions or elective contributions that in the
aggregate exceed 6 percent of the employee’s compensation, (ii) the rate of
matching contributions does not increase
as the rate of employee contributions or
elective contributions increases, and (iii)
at any rate of employee contributions or
elective contributions, the rate of matching contributions that would apply with
respect to any HCE who is an eligible employee is no greater than the rate of
matching contributions that would apply
with respect to an NHCE who is an eligible employee and who has the same rate
of employee contributions or elective
contributions. If a plan provides matching contributions with respect to employee contributions or elective contributions, those employee contributions or

November 16, 1998

elective contributions may be restricted
only to the extent permitted under section
V.B.1.c.
4. Matching Contributions Generally Must be Required Under
Plan Terms
a. ADP Test Safe Harbor
As provided under section V.B.1.a, a
matching contribution may be taken into
account in determining whether the
matching contribution requirement of the
ADP test safe harbor is satisfied only if
the contribution is required to made under
the terms of a plan. Even though matching contributions made at the employer’s
discretion may not be taken into account
in determining whether the matching contribution requirement of section V.B.1 is
satisfied, a plan that satisfies the safe harbor contribution requirement of section
V.B will not fail to satisfy the ADP test
safe harbor merely because additional
matching contributions are made at the
employer’s discretion.
b. ACP Test Safe Harbor
A plan fails to satisfy the ACP test safe
harbor for a plan year if the plan provides
for matching contributions made at the
employer’s discretion on behalf of any
employee that, in the aggregate, could exceed a dollar amount equal to 4 percent of
the employee’s compensation. This limitation on matching contributions made at
the employer’s discretion does not apply
to plan years beginning before January 1,
2000.
C. Special Rule for Matching Contributions Under a § 403(b) Plan
For purposes of § 403(b)(12)(A)(i), a
§ 403(b) plan is treated as satisfying the
requirements of § 401(m) with respect to
matching contributions if the plan satisfies the safe harbor contribution requirement of section V.B, the notice requirement of section V.C, and the matching
contribution limitations of subsection B
of this section VI. For purposes of applying the requirements of section V and this
section VI, salary reduction contributions
under a § 403(b) plan are treated as elective contributions under a CODA.
D. Examples
The following examples illustrate the

20

requirements of the ACP test safe harbor
described in this section VI:
Example 1
(a) An employer’s only plan, Plan M,
contains a CODA that satisfies the ADP
test safe harbor using safe harbor matching contributions under the basic matching formula. No contributions, other than
elective contributions and contributions
under the basic matching formula, are
made to Plan M.
(b) Because the CODA under Plan M
satisfies the ADP test safe harbor using
the basic matching formula and Plan M
provides for no other matching contributions, Plan M automatically satisfies the
ACP test safe harbor.
Example 2
(a) Beginning January 1, 2000, Employer B maintains Plan N, the only plan
maintained by Employer B. Plan N contains a CODA that satisfies the ADP test
safe harbor using a 3-percent safe harbor
nonelective contribution. Plan N also
provides matching contributions equal to
50 percent of each eligible employee’s
elective contributions up to 6 percent of
compensation. Under Plan N, elective
contributions are limited to 10 percent of
an employee’s compensation and are limited in accordance with § 402(g) and
§ 415. Under Plan N, an employee may
change a cash or deferred election at any
time. Plan N provides a definition of
compensation that satisfies § 414(s) and
that same definition is used for all purposes under Plan N. Matching contributions under Plan N are fully vested after 3
years of service. No other matching contributions are provided for under Plan N.
The plan is maintained on a calendar-year
basis and all contributions for a plan year
are made within 12 months after the end
of the plan year.
(b) Based on these facts, Plan N satisfies the ACP test safe harbor with respect
to matching contributions because each
NHCE eligible to receive an allocation of
matching contributions under Plan N is
also an eligible employee under a CODA
that satisfies the ADP test safe harbor of
section V and because the matching contribution limitations of subsection B of
this section VI are satisfied.

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Example 3
(a) The facts are the same as in Example 2, except that Plan N also provides
matching contributions equal to 50 percent of each eligible employee’s employee contributions up to 6 percent of
compensation.
(b) Plan N does not satisfy the matching contribution limitations of subsection
B of this section VI because matching
contributions can be made with respect to
elective contributions and employee contributions that, in the aggregate, equal 12
percent of compensation (and thus exceed
6 percent of compensation).
Example 4
(a) The facts are the same as in Example 2, except that Plan N also provides
that Employer B, in its discretion, may
make additional matching contributions
up to 50 percent of each eligible employee’s elective contributions that do not
exceed 6 percent of compensation.
(b) Plan N does not fail to satisfy the
ACP test safe harbor on account of discretionary matching contributions, because,
under Plan N, the amount of discretionary
matching contributions cannot exceed 4
percent of an employee’s compensation.
VII. TIMING OF PLAN
CONTRIBUTIONS
A. In General
As provided in subsections B and C of
this section VII, matching and nonelective
contributions under a plan using the safe
harbor methods must be made to the plan
within the same time period that would
apply if these contributions were made to
a plan using the current year testing
method for ADP or ACP testing purposes
(that is, no later than 12 months after the
close of the plan year).
Matching and nonelective contributions also may be made from time to time
during the plan year, instead of at one
time after the close of the plan year. Regardless of the timing of employer contributions, however, the total amount of
matching or nonelective contributions for
the plan year still must satisfy the requirements of sections V and VI, taking into
account the total amount of compensation
for the plan year, in order for a CODA to
satisfy the ADP test safe harbor.

1998–46 I.R.B.

B. Contributions Under the ADP Test
Safe Harbor
A CODA will not satisfy the ADP test
safe harbor for a plan year unless safe harbor matching and nonelective contributions needed to satisfy the safe harbor
contribution requirement of section V.B
are made in accordance with the allocation and timing rules of § 1.401(k)–
1(b)(4).
C. Matching Contributions Under the
ACP Test Safe Harbor
Matching contributions are taken into
account for a plan year under the ACP test
safe harbor of section VI in accordance
with the allocation and timing rules of §
1.401(m)-1(b)(4)(ii)(A).
VIII. INTERACTION WITH OTHER
RULES AND TESTING METHODS
A. In General
A CODA that is treated as satisfying the
ADP test under § 401(k)(3)(A)(ii) and
§ 1.401(k)-1(b)(2) will not be treated as a
qualified CODA unless the arrangement
satisfies the other requirements of
§ 401(k). For example, under § 401(k)(3)(A)(i), the group of eligible employees
under the section 401(k) plan must satisfy
the requirements of § 410(b), under
§ 401(k)(4)(A), benefits (other than matching contributions) must not be contingent
on an election to defer, and elective contributions must satisfy the allocation and timing rules of § 1.401(k)–1(b)(4). A plan that
satisfies the ADP or ACP test safe harbor
must satisfy all other qualification requirements of the Code that are applicable to the
plan, such as the nondiscriminatory availability of benefits, rights, and features
under § 401(a)(4) and the limitations of
§§ 401(a)(17), 401(a)(30) and 415.
B. Use of Safe Harbor Nonelective
Contributions to Satisfy Other
Nondiscrimination Tests
A safe harbor nonelective contribution
used to satisfy the nonelective contribution requirement under section V.B.2 may
also be taken into account for purposes of
determining whether a plan satisfies
§ 401(a)(4). Thus, these contributions are
not subject to the limitations on qualified
nonelective contributions under
§ 1.401(k)–1(b)(5)(ii), but are subject to

21

the rules generally applicable to nonelective employer contributions under §
401(a)(4). See § 1.401(a)(4)–1(b)(2)(ii).
However, pursuant to § 401(k)(12)(E)(ii),
to the extent they are needed to satisfy the
safe harbor contribution requirement of
section V.B, safe harbor nonelective contributions may not be taken into account
under any plan for purposes of § 401(l)
(including the imputation of permitted
disparity under § 1.401(a)(4)–7).
C. Top-Heavy Rules
1. Safe Harbor Nonelective Contributions
Safe harbor nonelective contributions
may be counted under § 416 toward the
minimum contribution requirement for
top-heavy plans. Thus, if a plan allocates
to all eligible employees a 3-percent safe
harbor nonelective contribution, the plan
generally would also satisfy the top-heavy
minimum contribution requirement. See
§ 1.416–1, M-18 for a similar rule applicable to qualified nonelective contributions.
2. Safe Harbor Matching
Contributions
If a plan uses contributions allocated to
employees on the basis of elective contributions or employee contributions to satisfy the top-heavy minimum contribution
requirement under § 416, these contributions are not treated as matching contributions for purposes of §§ 401(k) and
401(m). Therefore, safe harbor matching
contributions may not be counted toward
the minimum contribution requirement
for top-heavy plans under § 416. See
§ 1.416–1, M–19.
D. Qualified Matching Contributions
and Qualified Nonelective Contributions
To the extent they are needed to satisfy
the safe harbor contribution requirement
of section V.B, safe harbor matching and
nonelective contributions may not be used
as qualified matching contributions and
qualified nonelective contributions, respectively, under any plan for any plan
year. For example, if a plan satisfies the
safe harbor contribution requirement
using a safe harbor nonelective contribution by allocating a 7-percent safe harbor
nonelective contribution to all eligible

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Page 22

employees, contributions in an amount
equal to the first 3 percent of each employee’s compensation may not be used
as a qualified nonelective contribution
under the ACP test. However, safe harbor
nonelective contributions in an amount
equal to the remaining 4 percent of each
employee’s compensation may be used to
satisfy the ACP test (subject to the requirements of § 1.401(m)–1(b)(5)).
E. Testing Methods Under Notice 98–1
For purposes of Notice 98–1, a plan
that uses the safe harbor methods to satisfy the ADP or ACP test for a plan year is
treated as using the current year testing
method for that year and, thus, is subject
to the rules contained in section VII of
Notice 98–1 (relating to changes from
current year to prior year testing).
In addition, in the case of a plan that is
not maintained on a calendar plan year
basis, the anti-abuse provision of section
VIII of Notice 98–1 applies in a similar
manner to changes between the safe harbor methods and the current or prior year
testing method.
F. Continued Application of the ACP
Test to Certain Contributions
1. Employee Contributions
Even if a defined contribution plan satisfies the ACP test safe harbor of section
VI with respect to matching contributions,
the plan still must satisfy the ACP test in
the manner described in paragraph 3 of
this section VIII.F with respect to employee contributions made under the plan.
2. Matching Contributions that Fail to
Satisfy the ACP Test Safe Harbor
If a plan satisfies the ADP test safe harbor of section V.A, but fails to satisfy the
ACP test safe harbor with respect to
matching contributions under the plan,
then the plan must satisfy the ACP test in
the manner described in paragraph 3 of
this section VIII.F.
3. Special Rules for ACP Test
If paragraph 1 or 2 of this section
VIII.F applies, then the plan must satisfy
the ACP test under § 401(m)(2), and
under § 1.401(m)–1(b), as modified by
Notices 97–2 and 98–1, using the current
year testing method. However, in applying the ACP test, an employer may elect

November 16, 1998

to disregard with respect to all eligible
employees (i.e., all HCEs and NHCEs)
(1) all matching contributions, if the ACP
test safe harbor of section VI is satisfied
or (2) matching contributions that do not
exceed 4 percent of each employee’s
compensation, if the matching contribution requirement of section V.B.1 is satisfied. Except as otherwise provided in
section VIII.D, qualified nonelective contributions may be treated as matching
contributions to the extent permitted
under § 1.401(m)–1(b)(5). Finally, in applying the ACP test (i) matching contributions may not be treated as elective contributions under § 401(k)(3)(D) to a CODA
that satisfies the ADP test safe harbor
(and thus excluded from the ACP test
under § 401(m)(3)) and (ii) elective contributions under a CODA that satisfies the
ADP test safe harbor may not be treated
as matching contributions under
§ 401(m)(3).
G. Multiple Use Test
The restrictions on multiple use under
§ 1.401(m)–2 do not apply to a CODA that
satisfies the ADP test safe harbor. In addition, the restrictions on multiple use under
§ 1.401(m)–2 do not apply to a defined
contribution plan that satisfies the ACP test
safe harbor, if the plan does not permit employee contributions. In determining
whether multiple use of the alternative limitation under § 401(k)(3)(A)(ii)(II) or
§ 401(m)(2)(A)(ii) occurs with respect to
another plan of an employer, (1) a CODA
that satisfies the ADP test safe harbor and
(2) a defined contribution plan that satisfies the ACP test safe harbor and does not
permit employee contributions, are disregarded for purposes of § 1.401(m)–2(b).
In the case of a defined contribution plan to
which subsection F.1 or F.2 of this section
VIII applies (that is, a defined contribution
plan that satisfies the ACP test safe harbor
but permits employee contributions, or a
defined contribution plan that fails to satisfy the ACP test safe harbor), the special
rules of subsection F.3 of this section VIII
(relating to ACP testing) also apply for
purposes of § 1.401(m)–2(b) in determining whether the multiple use of the alternative limitation occurs.
H. Early Participation Rules
Sections 401(k)(3)(F) and 401(m)(5)(C), which provide alternative nondis-

22

crimination rules for certain plans that
provide for early participation, do not
apply for purposes of the safe harbor
methods. However, see section IX.B.1
for application of the § 410(b)(4)(B) rule
permitting the separate testing of employees who satisfy age and service conditions
under the plan that are lower than the
greatest age and service conditions permitted under § 410(a).
IX. MULTIPLE CODAS OR
MULTIPLE PLANS
A. Satisfying Safe Harbor Contribution Requirement Under Another
Defined Contribution Plan
1. In General
Safe harbor matching or nonelective
contributions may be made to the plan
that contains the CODA or to another defined contribution plan that satisfies §
401(a) or § 403(a). If safe harbor contributions are made to another defined contribution plan, the safe harbor contribution requirement of section V.B must be
satisfied in the same manner as if the contributions were made to the plan that contains the CODA. Consequently, each employee eligible under the plan containing
the CODA must be eligible under the
same conditions under the other defined
contribution plan.
2. Plan Year Requirement
In order for safe harbor contributions to
be made to another defined contribution
plan, that plan must have the same plan
year as the plan containing the CODA.
However, for plan years of plans containing CODAs beginning before January 1,
2000, contributions used to satisfy the
safe harbor contribution requirement of
section V.B for a CODA also may be
made to another defined contribution plan
that does not have the same plan year as
the plan containing the CODA, provided
that the safe harbor contribution is allocated as of a date within the plan year of
the plan containing the CODA and is
made no later than 12 months after the
close of that plan year.
3. Section 410(b) Aggregation Not
Required
In order for safe harbor contributions to
be made to another defined contribution

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Page 23

plan, it is not necessary that the other plan
be capable of being aggregated with the
plan containing the CODA for purposes
of § 410(b). Therefore, notwithstanding
§§ 1.410(b)–7(c)(2) and 54.4975–11(e), a
contribution to an ESOP may be used to
satisfy the safe harbor contribution requirement of section V.B for a CODA that
is not part of the ESOP.
4. Contributions Used Only Once
Safe harbor matching or nonelective
contributions cannot be used to satisfy the
safe harbor contribution requirement of
section V.B with respect to more than one
plan.
B. Aggregation and Disaggregation
Rules
1. Plans
The rules that apply for purposes of aggregating and disaggregating CODAs and
plans under §§ 401(k) and 401(m) also
apply for purposes of §§ 401(k)(12)
and 401(m)(11), respectively. See
§§ 1.401(k)–1(b)(3) and 1.401(m)–1(b)(3).
Accordingly, all CODAs included in a
plan are treated as a single CODA that
must satisfy the safe harbor contribution
requirement of section V.B and the notice
requirement of section V.C. Moreover,
two plans (within the meaning of
§ 1.410(b)–7(b)) that are treated as a single plan pursuant to the permissive aggregation rules of § 1.410(b)–7(d) are treated
as a single plan for purposes of the safe
harbor methods. Conversely, a plan
(within the meaning of § 414(l)) that includes a CODA covering both collectively bargained employees and noncollectively bargained employees is treated
as two separate plans for purposes of
§ 401(k), and the ADP test safe harbor
need not be satisfied with respect to both
plans in order for one of the plans to take
advantage of the ADP test safe harbor.
Similarly, if, pursuant to § 410(b)(4)(B),
an employer applies § 410(b) separately
to the portion of a plan (within the meaning of § 414(l)) that benefits only employees who satisfy age and service conditions
under the plan that are lower than the
greatest minimum age and service conditions permitted under § 410(a), the plan is
treated as two separate plans for purposes
of § 401(k), and the ADP test safe harbor
need not be satisfied with respect to both

1998–46 I.R.B.

plans in order for one of the plans to take
advantage of the ADP test safe harbor.
2. Highly Compensated Employees
In accordance with §§ 401(k)(3) and
401(m)(2), elective or matching contributions under a plan made on behalf of an
HCE who is eligible to participate in more
than one plan of the same employer providing such contributions must generally
be aggregated and treated as made under
each of the plans, even if one or more of
the plans is intended to satisfy the ADP or
ACP test safe harbor. Thus, for example,
if an HCE is simultaneously an eligible
employee under two plans maintained by
an employer for a plan year, only one of
which one is intended to satisfy the ADP
and ACP tests using the safe harbor methods, and the matching contribution formula of the plan that is not using the safe
harbor methods provides greater matching contributions than the formula under
the plan that is intended to satisfy the
ADP and ACP tests using the safe harbor
methods, the rules in sections V.B.1.b and
VI.B.3 (prohibiting an HCE from receiving a greater rate of matching contributions than an NHCE) could be violated.
These issues could also arise, for example, when an HCE is transferred from a
plan maintained for one group of employees to a plan maintained for another group
of employees.
X. PLAN YEARS OF FEWER THAN
12 MONTHS
A plan will fail to satisfy the ADP test
safe harbor or the ACP test safe harbor for
a plan year unless (i) the plan year is 12
months long or (ii) in the case of the first
plan year of a newly established plan
(other than a successor plan), the plan
year is at least 3 months long (or, any
shorter period in the case of a newly established employer that establishes the
plan as soon as administratively feasible
after the employer comes into existence).
XI. PLAN PROVISIONS RELATING
TO SAFE HARBORS
A. General Rules
1. Plan Must Include Safe Harbor
Provisions
Sections 1.401(k)–1(b)(2)(iii) and
1.401(m)–1(b)(2) require that a plan to

23

which § 401(k) or § 401(m) applies provide that the ADP or ACP test will be met.
Because, effective for plan years beginning after December 31, 1998, a plan may
use the SIMPLE 401(k) plan formula or
safe harbor provisions as alternatives to
the ADP and ACP tests, a plan must specify which of these alternatives it is using.
Generally, a plan sponsor that intends to
use the safe harbor provisions for a plan
year must adopt those provisions before
the first day of that plan year. However,
see section XI.B for the remedial amendment period applicable to plan changes
incorporating the safe harbor provisions.
2. Safe Harbor Contributions Made to
Another Plan
If, pursuant to section IX.A, safe harbor matching or nonelective contributions
will be made to another plan, the name of
the other plan must be specified in the
plan containing the CODA. Moreover, if
safe harbor matching or nonelective contributions will be made to another plan for
a plan year, the other plan must also
adopt, before the first day of that plan
year, provisions specifying that the safe
harbor contributions will be made and
providing for the withdrawal and vesting
restrictions required by § 401(k)(12)(E)(i). However, see section XI.B for the
remedial amendment period applicable to
plan changes incorporating the safe harbor provisions.
3. Disaggregated Plans
If a plan, within the meaning of
§ 414(l), is composed of disaggregated
plans under § 1.410(b)–7(c), the plan provisions must specify which disaggregated
plans are subject to the safe harbor provisions.
B. Remedial Amendment Period
Section 1.401(b)–1T(b)(3) authorizes
the Commissioner to designate a plan provision as a disqualifying provision that either (1) results in the failure of the plan to
satisfy the qualification requirements of
the Code by reason of a change in those
requirements or (2) is integral to a qualification requirement that has been changed.
Section 1.401(b)–1T(c)(3) authorizes the
Commissioner, in the case of a disqualifying provision designated as described in
the preceding sentence, to impose limits

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and provide additional rules regarding the
amendments that may be made with respect to that disqualifying provision.
Pursuant to § 1.401(b)-1T(b)(3) and
(c)(3), a plan provision is hereby designated as a disqualifying provision if the
plan provision is integral to a qualification requirement changed by a provision
of SBJPA that becomes effective on the
first day of the first plan year beginning
after December 31, 1998, provided that
the following conditions are satisfied.
First, the plan provision must be amended
to reflect the change made by SBJPA by
no later than the last day of the first plan
year beginning after December 31, 1998.
(If an employer or plan administrator files
a request for a determination letter on the
qualified status of a plan by the last day of
the first plan year beginning after December 31, 1998, then the date by which the
plan provision must be amended shall be
extended through the 91st day following
the applicable date under § 1.401(b)–
1(e)(3)(i) or (ii).) Second, the plan provision as amended must be effective as of
the first day of the first plan year beginning after December 31, 1998. Thus, if a
plan uses the safe harbor methods for the
plan year beginning in 1999, the plan generally must be amended no later than the
end of that plan year, retroactive to the
first day of that year, to reflect the safe
harbor methods. This remedial amendment period also applies to a plan amendment reflecting the use of the early participation rules under §§ 401(k)(3)(F) and
401(m)(5)(C).
The preceding paragraph does not permit a CODA to be adopted retroactively.
See § 1.401(k)–1(a)(3)(ii).
A plan amendment described in this
section XI.B shall not be treated as violating the requirements of § 411(d)(6)
merely because the plan amendment imposes the withdrawal restrictions required
by § 401(k)(12)(E)(i), provided that those
withdrawal restrictions do not apply with
respect to contributions allocated as of a
date before the first day of the first plan
year beginning after December 31, 1998.
REQUEST FOR COMMENTS
The Service and Treasury invite comments and suggestions concerning the
guidance provided in this notice. Comments are specifically requested as to
whether there are circumstances (in addi-

November 16, 1998

tion to the first plan year of a newly established plan) in which the use of the safe
harbor methods would be appropriately
allowed for a plan year of less than 12
months (e.g., certain corporate merger or
acquisition transactions involving a plan
sponsor maintaining a plan using the safe
harbor methods, if appropriate conditions
are satisfied).
Comments can be addressed to
CC:DOM:CORP:R (Notice 98–52), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the hours
of 8 a.m. and 5 p.m. to CC:DOM:
CORP:R (Notice 98–52), Courier’s Desk,
Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may transmit comments electronically via the IRS Internet
site at: http://www.irs.ustreas.gov/prod/
tax_regs/comments.html.
PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and Budget (OMB) in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 15451624.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collection of information in this
notice is in section V.C, “Notice Requirement,” and section XI, “Plan Provisions
Relating to Safe Harbors.” The collection
of information is required to obtain a benefit. The likely respondents are businesses or other for-profit institutions, and
not-for-profit institutions.
The estimated total annual reporting/
recordkeeping burden is 80,000 hours.
The estimated annual burden per respondent/recordkeeper is 1 hour and 20
minutes. The estimated number of respondents/recordkeepers is 60,000.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

24

Drafting Information
The principal author of this notice is
Roger Kuehnle of the Employee Plans Division. For further information regarding
this notice, please contact the Employee
Plans Division’s taxpayer assistance telephone service at (202) 622-6074/6075
(not toll-free numbers), between the hours
of 1:30 and 3:30 p.m. Eastern Time, Monday through Thursday.

1999 Limitations Adjusted As
Provided in Section 415(d),
Etc.1
Notice 98–53
Section 415 of the Internal Revenue
Code (the Code) provides for dollar limitations on benefits and contributions
under qualified plans. Section 415 also
requires that the Commissioner annually
adjust these limits for cost-of-living increases. Other limitations applicable to
deferred compensation plans are also affected by these adjustments.
Effective January 1, 1999, the limitation for the annual benefit under
§ 415(b)(1)(A) for defined benefit plans
remains unchanged at $130,000. For participants who separated from service before January 1, 1999, the limitation for
defined benefit plans under § 415(b)(1)(B) is computed by multiplying the
participant’s compensation limitation, as
adjusted through 1998 by 1.0160. The
limitation for defined contribution plans
under § 415(c)(1)(A) remains unchanged
at $30,000.
The Code provides that various other
dollar amounts are to be adjusted at the
same time and in the same manner as the
dollar limitation of § 415(b)(1)(A) is adjusted. These dollar amounts and the adjusted amounts are as follows:
The limitation on the exclusion for
elective deferrals under § 402(g)(1) remains unchanged at $10,000.
The
dollar
amount
under
§ 409(o)(1)(C)(ii) for determining the
maximum account balance in an employee stock ownership plan subject to a
5-year distribution period is increased
from $725,000 to $735,000, while the
1Based on News Release IR-98-63, dated October 23, 1998.

1998–46 I.R.B.