Reg 108639-99 Retirement Plans; Cash or Deferred Arrangements Under Section 401(k) and Matching Contributions or Employee Contributions Under Section 401(m) Regulations

-

Wednesday,
December 29, 2004

e!

rn

Part

m

Department of the
Treasury
Internal Revenue Setvice

26 CFR Parts 1 and 601
Retirement Plans; Cash or Deferred
Arrangements Under Section 402(k) and
Matching Contributions or Employee
Contributions Under Section 40 1(m)
Regulations; F i n d Rule

78144

Federal Register / Vol. 69, No. 249 1Wednesday, December 29, 2004 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 601
RIN 1545-AX26 and 1545-AX43

Retirement Plans; Cash or Deferred
Arrangements Under Section 401 (k)
and Matehlng Contributions or
Employee Contributions Under Section
401{rn) Regulations

Internal Revenue Service (IRSI.
Treasury.
ACTlON: Final regulations.
AGENCY:

This document contains final
regulations that provide guidance for
certain retirement plans containing cash
or deferred arrangements under section
401(k] and providing for rnatchi~~g
conbibutions or employes coritributioris
under seution 401 (m]. These regulations
affect sponsors of plans that contain
cash or deferred arrangements a r
provide for employee or matching
contributions, and participants ill these
plans.
DATES: Effective Date: These regulations
are effective December 29, 2004.

SUMMARY:

FOFt FURTHER INFORMATION CONTACT:

Concerning the rcgulalions, R. Lisa
Mojiri-Azad or John T. Ricotta at (2021
622-6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in these final regulations have
beer1 reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 15451669. Responses to this collection of
infortnation are mandatory.
A n agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the OFfice of
Management and Budget.
The estimated alnual burden per
respondent varies From ,033 hour to 2.5
hours, depending on the individual
circumstances, with an estimated
average of 1 hour,1 0 nlinutes.
Comments concerning the accuracy of
this burden estimate a11d suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP,
Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Departrnent of the Treasury, Office of

Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating lo a
collection of information must be
retained as long as their contents might
become material in the administration
of any internal revenue law. Generally,
tax returns and taw. return information
are conhdcntial, as required by 2 6
U.S.C. 6103.
Background
This documet~tcontains final
regulaiions setting forth the
requirements [including the
nondiscrimjneiion requirements) for
cash or deferred arrangements under
section 403 (k) and for matching
contribuiions and employee
contributions under section 402(rn) of
the Internal Revenue Code [Code).
Comprehensive final regula~iulls
under sections 401(k) and 401[1nj DI
the
Code were last published in the Federal
Register in TD 8 3 5 7 (published Augl~st
9, t g g l ) and TD 8376 (published
December 2,1991) and amended by TI)
8581 published on December 22,1994
(the pre-SBPA regulations). Since 1994,
many significant changes have been
made to sections 401(k)and 401(m]by
the Small Dnsinsss Job Protection Act of
1996, Public Lnw 104-188 (110Stat.
1755) (SBJPA),the Taxpayer Relief Act
of 1997, Public Law 105-34 (111 Stat.
788)(TRA '97), and thc Economic
Growth and Tax Rel ier Reconciliation
Act of 200 1. Public Law 107-1 6 (115
Stat. 38) (EGTRRA].
The most substantial changes to the
stalulory provisions of scction 401(k)
and section 401(rn) were made to t h e
meihodolopy lot tesiing [he amount of
electivr: contributio~ls,matching
coniributians, and employee
contrihurions for nondiscrimination.
Section 401 [a)(4) prohibits
discrimination in contributio~lsor
benefits in favor of highly compensated
employees, within the meaning of
section 414(q)(HCEs]. Section 401Ik)provides a special nondiscrimination
test for elective contributions under a
cash or dcferred arrangement that is part
of a profit-sharing plan, stock bonus
plan, pre-ERISA money purchase plan,
or rural cooperative plan. called the
actual deferral percentage (ADP] test.
Section 401(m)provides a parallel test
far matching contributions and
employee contributions under a defined
contribution plan, called the actual
contribution percentage (ACP) test.
These special nondiscrimination
standards are pruvided in recognitiotl of
the fact that the amount of elective
contributions and crnpluyee
contributions [and corresponding
matching contributions) is determined

by the employee's utilization of the
contribution opportunity offered under
the pian. This is in contrast to the
situation in other defined contribution
plans where the amount of
contributions is determined by the
amount the employer decides to
contribute.
Sections 401(k] and 401[m) ~ r o v i d e
alternative methods for satisbing the
applicable nondiscrimination rules: a
mathematical compwison a i d a number
of design-based methods. The inherent
variation in the amount of contributions
among employees, and the fact that the
economic situation of HCEs may make
them more likely to make elective or
employee contributions, means that the
usual nondiscrimination test under
scction 40l(aj(4)-under which, for
each HCE with a contribution level,
there must hc n specified number of
nonhighly compensated employees
(NHCEs] with equal or greater
contributions-is not appropriate.
Instead, avcrage rates of contributions
are used in the ADP and ACP tests (with
R built-in differential permitted for
HCEs) and minimum standards for
nonelective or ma~cbingcontributions
are provided in the design-based
alternatives.
Prior to the enactment of SBJFA,
sections 401(k) and 401(m)provided
only for mathematical comparison.
Specifically, the ADP and ALP tests
compare the average of the rates of
contributions of the HCEs to the average
of the rates of contributions of the
NHCEs.For this purpose, the rafe of
contributions for an employee is the
amount of contributions for an
employee divided by the employee's
compensation for the plan year. These
tests are satisfied if the avcrnge rate of
HCE contributions does not exceed 1.25
times the average rate of contributions
of the NHCEs. Alternatively, these tests
are satisfied if the avcrage rate of HCE
contributions does nat exceed the
werage rate or coritributions of the
NHCEs by more than 2 percentage
points and is no more than 2 times the
average rate of contributions of the
NHCEs.To the extent that these tests are
not satisfied, the statute provides for
correction through distribution to HCEs
(or forfeiture of nonves~edmatching
contributions) or, to the extent provided
in regulations, recharacterization of
elective contributions as after-tax
contributions. In addition, to the extent
provided in regulations, nonelective
contributions can be made to NHCEs
and elective contributions and certain
matching contributions can be moved
between the ADP and ACP tests, in
order the reduce the discrepancy
between the average rates of

Federal Register / Val. 69, No. 249 / Wednesday, December 29, 2004 1Rules and Regulations
contributions under the safe harbor
rules for hardship distributions.
SBJPA added design-based alternative
Beginning in 2006, section 401[k)
methods of satisFying the ADP and ACP plans will be permitted to allow
tests. Under these methods, if a plan
employees to designate their elective
meets certain contribution and notice
contributions as "Roth contributions"
requireulents, the plan is deemed to
that will generally be subject to taxation
satisfy the nondiscrimination rules
under the rules applicable to Roth lRAs
without regard to actual utilization of
under section 408A.
the contribution opportunity oEEered
Section 401(k] plans using the
under the plan. These regulations reflect design-based safe harbor and providing
no additional contributions in a year are
this change and the other changes that
were made to sections 401(k)and
exempted from the top-heavy rules of
401[ml under SBJPA.T R A '97 and
section 416.
Distributions from section 401(k)
EGTRRA since the issuance of the preplans are permitted upon "severance
SBJPA regulations.
SBJPA made the following significant from employment" rather than
"separation from service."
changes affecting section 401(k) and
The multiple use test formerly
section 401(m) plans:
The ADP test and ACP lest were
specified in section 401 (mj(9)is
amended to allow the use of prior year
repealed.
Faster vesting is required For
data for NHCBs.
The method of distributing to
~natchingcuntributions.
Matchins conhibutiuns are taken
correct Cailures of the ADP test or ACP
test was changed to require distribution into accuullt in satisfying the top-hcaw
requirements 01section 41 6.
to the HCEs with the highest
I n addition. since publication of thr
contributions.
pre-SRJFAregulations, a n u ~ n b e rof
Tau-exempt organizations and
Indian tribal governments are permitted items of guidance affecting section
4 O l l k ) and section 401(m] plans
to maintain section 401(k) plans.
Safe harbor alternatives to the ADP addressing t hesc statutory changes and
other issues have h c ~ nreleased by the
test and ACP test were introduced in
IRS, including:
order to provide design-based methods
Notice 97--2 (19~7-I C B. 348)
to satisfy the nondiscrimination tests.
provides initial guidance on prior ycar
The SIMPLE 401(k) plan (an
ADP and ACP testing and guidance on
alternative design-based method to
correction of excess contributions and
satisfy the nondiscrimination tesis for
small employers that corresponds to the excess aggregate contributions,
provisions of section 408(p)for STMPLE including distribution to the HCEs with
IRA plans by providing for smaller
the highest contributiorls.
Rev. Proc. 97-9 (1997-1 C.B. 6241
contributions) was added.
A special testing option was
provides model amendments for
provided for plans that permit
SIMPE 401(k)plans.
Notice 98-1 (lg98-1 C.B.327)
participation before employees meet the
lnininluln age and service requirements, provides additional guidance on prior
year testing issues.
in order to encourage employers to
Notice 98-52 (1998-1 C.R. 632)and
permit employees to start participating
Notice 2000-3 (200&1 C.B.41 3)
soonerprovides guidance on safe harbor
TRA '97 made the following
section 401 [k)plans.
significant changes affecting section
Rev. Rul. 2000-8 (2000-1 C.B. 6i7)
401(k) and section 401(m) plans:
addresses the use of automatic
Grandfathered state and local
enrollment features in section 401(k)
governmental plans are treated as
plans.
automatically satisfying the ADP and
Notice 2001-56 (2001-2 C.B. 277)
ACP tests.
and Notice 20024 (2002-1 C.B. 298)
Matching contributions for selfprovided initial guidance related to the
employed individuals are no longer
changes made by EGTRRA.
treated as elective contributions.
These items of guidance, with some
EGTRRA made the following
modification, were incorporated into the
significant changes affecting section
proposed regulations under section
401 (k) and section 401(m]plans:
Catch-up contributions were added 401(k)and section 401(m) which were
to provide for additional elective
published in the Federal Register on
July 17, 2003.68 FR 42476.
contributions for participants age 50 or
C)n November 12,2003, a public
older.
The Secretary is directed to change hearing was held on the proposed
the section 401(k) regulations to shorten regulations. After consideration of the
the period of time that an employee is
c-omments, these.final
.
regulalions adopt
the provisions of the proposed
stopped from making clectivc
contribution for the H a s and the

NHCEs.

78145

regulations with certain modifications,
the most significant of which are
highlighted below.
Explanation of Provisions
I . Rules Applicable to AII Gosh or
Deferred Arrangements
Section 401(kj(l]provides that a
profit-sharing, stock bonus, pre-ERISA
money purchase or rural cooperative
plan will not fail to qualify under
section 401(a) merely because it
contains a qualified cash or deferred
arrangement.As under the proposed
regulations, 5 1.401(k)-3 sets forth the
general definition of a cash or deferred
arrangemcnt (CODA), the additional
requirements that a CODA must satisfy
in order to be a qualified CODA, and the
treatment of contributions made under a
qualified or nonqualified CODA.
As under the propoacd regulations.
the final regulations define a CODA as
an arrangement under which employees
can make a cash or deferred election
with respect to contributions to, or
accruals or benefits under, a plan
intended to salisfy the requirements of
section 401(a). A cash or deferred
election is any direct or indirect election
by an employee (or modification of an
earlier election) to have the employer
either: (11 Provide an amount to the
employee in the form of cash or some
other taxable benefit that is not
currently available: or (2) contribute an
amount to a trust, or provide nn accrual
or other benefit, under a plan deferring
the receipt of compensation. These final
regulations retain the definition of a
CODA from the proposed regulations,
with some minor modifications. First,
the exclusion of an arrangement under
which employees make after-tax
contributions from the definition of a
CODA does not encompass an
arrangement under which employees
make designatcd Roth contrib~tions.~
Second, the final regulations clarify that
the regulatory provision specifying that
compliance with section 401 [k]and
section 402(e)(3) is the only means of
providing a cash or deferred election to
an employee without violating the
co~~structive
receipt rules is limited to
cash or deferred elections under which
the contribution or accrual is made
under a ualified plan or tnist.
As onler the proposed regulationr.
h e s e final regulations incorporate prior
guidance on automatic enrollment and
thus reflect the fact h a t a CODA can
specify that the default that applies in
the absence of all afirmative election by
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Treasury and tbs IRS expect t~ imsue guidance on
desipaied Roth cootrib"ttorus m {he hear future

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78146

Federal Register 1Vol. 69, No. 249 / Wednesday, December 29, 2004 /Rules and Regulations

an employee can be a con~ributionto a
trust, as described in Rev. Rul. 1000-8.
Although the facts of Rev. Rul. 200Q-8
specified a certain percentage of
compensation that would apply as a
default, the percentage chosen was
merely illustrative. Thus, the final

responsible for transmitting funds to the
plan], while others suggested loosening
the rule where the early contribution
does not result in an accelerated
deduction.
After considering these comments, the
IRS and Treasury have concluded that
regulations do not constrain the choice
the prefunding of elective contributions
of default provision^.^ However, in
and matching contributions is
order to be a qualified CODA, as
inconsistent with sections 401 [k)and
indicated in Rev. Rul. 2000-8, it is cash 401(m)and that the restFiclions on the
in lieu of the default employer
timing of c~ntributi
ons are consistent
contribution.
with h e fundamental premise of
These final regulations also clarify the elective contribu~ions(;.e., these a e
rules relating to one-time irrevocable
contributions thel are paid to the plan
elections that are not treated as cash or
asarssultoianemployeeelcctionnot
deferred elections. First, the final
to receive those amounts in cash).
regulations replace the requirement that Accordingly, the final regulations
the election be made upon
generally provide that contributions are
commencement of employment or first
made pursuatlt to a casl, or deferred
becoming eligible under the plan or any electinn only i lthe contributions are
plan of the employer with the
made after the employee's performance
requirement that thr election be made
of services which retatc to the
no later than first becoming e11gible
compensation that, but for the election,
under the plan or a n y other plan of thc
been paid to the employee,
employer. Second, the final regulations would have
contributed in anticipation of
define any other plan of the enlployer
bture
performance of services generally
for this purpose to mean any plan or
arrangement that is described in section are not treated as elective conbibutiorls
under these final regulations, Thus, an
219(g](5)(D], which jncludes a section
457(b] governmental plan and a section employer is not able to prefund elective
contributions in order to accelerate the
403(b) lan, as well as a qualified plan.
deductions for elective contributions;
The l n a l regulations retain [he rule
and employer contributions made under
that a contribution is made pursuant to
the facts in Notice 2002-48 (2002-2
a cash or deferred electiou only if the
C.B.139) are no longer permitted to be
contribution is made after the relevant
taken into account under the ADP test
election. Thus, a contribution made in
or
the ACP lest and would not satisfy
anticipation of an employee's election is
any plan requirement to provide
not treated as an elective contribution.
elective contributions or matching
A number of commentators indicated
contrib~itions.
that the rule in the proposed regulation
The proposed regt~lationscontained
requiring that elective contributions not
an exception to the rule precluding the
precede the services to which they
funding ofelective contribuiions before
relate (or the date when the
compensation would otherwise be paid, the performance of senlice5 i n the
if earlier than the date when the services situation where ihe compensativr~
would also have been paid, but for the
are performed] was too broad. Some of
election. before Ihe performance of
these commentators suggested the
services a n d ihat exception has been
addition of an exception to cover
retained in the final re'gulations. After
instances where the employer has
consideration of the admitlistrative
administrative reasons for depositing
the contributions before the employee's concerns raised by the comments, these
final regulations also include an
services or pay day (for example, the
exception for occasional bona fide
temporary absence of the bookkeeper
administrative considerations. Under
this exception, employer con~ributions
'The D ~ p W b n e of
~ l Labor has adv~swdTreasury
and the IRS &st. under Tille I of h e Employee
will not fail to satisfy the regulatory
Retirement Income Securitv Acl of 1 9 7 4 I"ERISA"1
requirements relating to the timing of
(OR Stat. 829). Public b w 9 3 4 0 6 . fiduciaries of a
elective contributions merely because
plan mwt ensure hithe plan IS administered
contributions for an occasional pay
prudently and solely m Lhs Interest o[ plan
participants and beneficiariss W h ~ l ERISA
e
section period are made before the services with
404(c) may serve lo relieve certain fiduciw~esh r n
respect to that pay
are
- " period
liability when p a r l i c ~ p a n l sor beoeficiar~esaxerclse
per?ormed,
provided
that
the
early
control over the essels in : h e ~ rrndividual accounts,
contributions are made for bona fide
the Dapartment of Labor has taken the powclon that
a participant or beneficiary wilt not be cons~dered
administrative considerations and are
to have exercised contml when the paruc~paotor
not made earlv with a n r i n c ni ~ a. Dumose
l x
beneficiary is merely apprised rbl utverlnlents that
of
deductkns,
I,., addition,
will be made on his or her behalf i t 1 he a l ~ s r n ~ t :
the
changes to
u l ~ r l s h c t ~ o ntos the contmry. See 29 CPR
2550 4Udc-1 and 57 FR 46924.
the rules precluding the prefunding of

acceleratini

matching contributions discussed
below.
One commentator asked for
clarificaiion of the interaction between
these timing rules and the rule under
the regulations that treats a selfemployed iridividual's earned income as
being currently available on the last day
of the individual's taxable year and
whether this last day rule precludes a
partner from making elective
contributions during the Year though a
reduction in the partner's draw. The
restriction on the timing of
contributions i s not intended to prevent
aPartnerfromdefe~ingarnountsthat
are paid to the partner throughout the
year on account of services performed
by the Partner during the year, and the
final regulations have been modified to
clarify this point*However*self" m ~ l o ~ eindividuals
d
who take
advantage of this opportunity to defer
make
amounts during the Year
Sure that the amount contributed during
t h e yeor will not exceed the limits {such
as the limits of s ~ c t i o n41 5 ) that will
tu the individual, based on the
individual's aciuaI earned income for
the "levant period.
2. Ouoljfied CODA^
A. General Rules Relating to Qualified

CODAS
Elective contributions under a
qualified CODA are treated as employer
conhibutions For purposes ofthe
Internal Revenue Code.3 Elcc tive
contributions under a qualified CODA
generally are not included in thc
employee's gross income at the time the
cash would have been received (but fur
the cash or deferred election) or at the
time contributed to the plan. Elective
contributions under a qualif ed CODA
are included in the employee's gross
income, however, if the contributions
are in excess of the section 402[gJ limit
for a year, are designated Roth
contributions (under section 402A,
effective Eor tax years beginning after
December 31, 20051,or are
recharacterized as after-tax
contributions as part of a correction of
an ADP test failure.
A CODA is not qualified unless it is
part of a profit sharing plan, stock bonus
plan. pre-ERISA money purchase plan,
or rural cooperslive plan and provides
for an election between contributions to
the plan or payments directly in cash.
'The Depnrtmpn: o f Labor has advised Treasury
,d hslRS be,its vrew
a
parlicipmt pays to or bas wlthbeld by an employer,
wbelher puruuanc to u cash or deferred e l d o n ur
nlherwise. for cuntrihution tu an employee benefit
plan conslitutr parlicipant cvntributionsfor
pwposer uf Sulrtitlt: A and Part 4 of Subtitle Rpf
Title l o t ERISA.

Federal Register 1 Vol. 69, No. 2491 Wednesday, December 29, 2:0041 Rules and Renulations
In addition, a CODA is not qualified
unless it meets the following
requirements: (1)The elective
contributions under the CODA satisfy
either the ADP test set forth in section
401(k)(3)or one of the design-based
alternatives in section eor ( k ) ( l l )or (IZ!:
(2) eiective contributions under the
CODA are nonforfeitable at all times; (3)
elective contributions are distributable
only on the occurrence of certain events,
including attainment af age 5g1/2,
hardship, death, disebility, severance
from employment, or termination of the
plan; (4) the group of employees eligible
to participate in the CODA satisfies the
coverage requirements of section
41O(b](l]; (51 no other benefit [other
than matching contributions and certain
other specified benefits) is conditioned,
directly or indirectly, upon the
employee's making or not making
elective contributions under the CODA;
and (6) no more than 1 year of service
is required for eligibiljty to elect to
make a cash or deferred election.
Subject to certain exceptions, State
and local goverrlmental plans x c not
allowed to include a qualif ed CODA.
Plans sponsored by fndian tribal
governments and rural cooperatives are
allowed to include a qualified CODA.
R. Nondiscrimination Rules Applicable
to Qualified CODAs
As under the proposed regulations,
these final regulations provide that the
special nondiscrimination standards set
forth in section 401 (k)[the ADP test, the
ADP safe harbor and the SIMPLE 401(k]
plan) are the exclusive means by which
a qualified CODA can satisfy the
nondiscriminatory amount of
contribution requirement o f section
401(a](4]. Pursuant to section
401(k)(3)(G). a State or local
governmental plan is deemed to satisfy
the ADP lesi.
These final regulations rctain the rule
that the plan must satisfy the
requirements of 1 . 4 0 1 ( a ) [ 4 ) 4 with
res ect to benefits, rights and features in
adlit ion to the requirements that
conhibutions satisfy the
nondiscrimination requirements of
section 401(k:. In addition to stating that
the availability of each level of elective
contribution is a right or Feature subject
to the requirements of section 401(a)(4),
the final regulations point out that the
right to make a designated Roth
contribution is a right or feature.
The proposed regulations included an
anti-abuse rule which provided that a
plan will not be treated as satisfying ihe
requirements of section 401 [k]if there
are repeated changes to plan testing
procedures or plan provisions that have
the effect of distorting the ADF so as to

increase significantly the permitted
deferrals for HCEs, or otherwise
manipulate l11e nondiscrimination rules
of section 403 (k), i f a principal purpose
of the changes was to a c h i ~ v esuch a
result.
Several commentators suggested
eliminating the anti-abuse n ~ l ein the
proposed regulations. One of these
commentators suggested that the
proposed regulation's restrictions on
ADP testing [including the restriction on
the use of targeted QNECs and changes
in testing method discussed below]
made the anti-abuse rule unnecessary
and noted that there may be legitimate
reasons (for example, change in
participant demographics or merger of
plans for administrative reasons) for
changes to a section 401(k) plan's
testing procedures. Another
commentator suggested that the antiabuse rule Le replaced with guidance
addressing various specific abusive
transaclions.
After considering these comments,
RS and Treasury have determined that
thc need for rules to prevcrit abuse
associated with changes in plan testing
procedures or other plan provisions to
inflate innppropriately the ADP for
NHCEs or to otherwise manipulate the
nondiscrimination provisions of section
401(k)outwrighs the concerns raised by
these comn~entators.In addition, IRS
and Treasury do not believe that the
anti-abuse provisions of the proposed
regulations constrain legilirnate testing
procedure changes. Therefore, thesc
final regulations retain the anti-abuse
provisions of the proposed regulations.
C. Aggregation and Disaggregation of
Plans
A s under the proposed regulations,
these final regulations consolidate the
rules regarding identification of CODAs
and plans for purposes of demonstrating
compliance with the requirements of
section 401(k) and retain the rule that
all CODAs included in a plan are treated
as a single CODA for purposes of
applying the nondiscrimination tests.
For this purpose, a plan is generally
defined by reference to 1.410(b)-7[a]
and b)after application of the
mandatory disaggregation rules of
5 1.41 0fi)-i'(c) (other than the
mandatory d i s w e g a t i o n of section
401(k) and section 401[m] plans) and
permissive aggregation rules of
5 1.410fi)-7[d), as modified under these
regulations. For example, if a plan
covers collectively bargained employees
and noncollectively bargained
employees, the elective contributions
forthe separate groi~psof employees
must be treated separately For
nondiscrimination under section 401Ik).

78147

proposed regulations, the
final regulations retain the special rules
in the pre-SBJFA regulations that permit
the aggregation of certain employees in
different collective bargaining units and
the prohibition on resiruciuring under
5 1.401Ia)[4~-9(cl.
The proposed regulations included a
change to the treatment of a CODA
under a plan that includes an ESOP.
Under the pre-SBJPA regulations, such
a plan must be disaggregated into the
ESOP and non-ESOP portions and apply
two separate ADP and ACP tests: one for
elective contributions going into the
ESOP portion (and invested in employer
stock) and one for elective contributions
going in the non-ESOP portion of the
plan. The proposed regulations
el~minatedthe disaggregation of the
ESOP and non-ESOP portions o f a singlr:
section 424(1] plan [or purposes of ADP
and ACP testing and allowed an
employer to permissively aggregate two
section 414(1) plans, one that is an ESOP
and one that is not.
Commentaiors responded favorably to
this change. Therefore, the f i n a l
regulatiotls retain the rule of the
p r o p o s ~ dregulations that eliminates the
disaggregation of the ESOP and nonESOP portions for the ADP and ACP
tests. Several of these comrnerltators
suggested that plans be
to
implerneni this change before the
effective date of the regulations. After
considering these comments, the IRS
and Treasury have determined that it
would not be in the best interest of plan
administration to allow this change to
be made before the effective date oE the
entire regulations. However, as
discussed below, a plan is permitted to
implement this change for plan years
that end after December 2s. 2004,
provided the plan applies all the rules
of these final regulations, to the extant
applicable, for that plan year and all
subsequent plan years
These final regulations retain the
proposed regulations' requirement that a
single testing method must apply to all
CODAs under a plan (after application
of the aggregation and disaggregation
rules as modified). This has the effect of
restricting an employer's ability to
aggregate section 414(1) plans for
purposes of section 410b) if those plans
apply inconsistent testing methods. For
example, a plan that applies the ADP
test of section 4 0 1 (k)(3)may not be
aggregated with a plan that uses the
ADP safe harbor of section 401 (k)[l2]for
purposes of section 410(b).However.
the Final regulations make clex that if
a plan is disaggregated into separate
plans undcr the rules of-section 410@),
each separate plan can apply a different
tesiing method. Thus, for example, if an
As under the