Amendments Required for 401(k) Plans
The Internal Revenue Service (IRS) finalized 401(k) and 401(m) regulations on December 29, 2004. The final regulations became effective for plan years that began after December 31, 2005 and plans generally must be amended by the last day of the plan year beginning in 2006 (that is, December 31, 2006 for a calendar year plan).
These final regulations impact employers who sponsor defined contribution plans that accept 401(k) elective deferrals, employee after-tax contributions, or employer matching contributions.
To avoid plan disqualification, a plan with no discretionary provisions, must generally adopt an interim good-faith amendment that incorporates final 401(k) regulations by December 31, 2006, or if later, the sponsoring employer’s tax filing deadline (including extensions) for entity’s year ending in 2006 (March 15, 2007 for calendar years). However, an amendment that also implements a discretionary provision under the final regulations, such as adding burial expenses to a plan’s safe harbor hardship rules, must be adopted by the end of the plan year in which it is to be effective (for example, a calendar year plan implementing such a provision for 2006 must adopt the discretionary amendment by December 31, 2006).
Required Action
Employers should immediately review their 401(k) plans to:
- Decide whether there are any advantages to adopting the available discretionary plan provisions
- Make necessary amendments, including those for current or preferred practices
Plante & Moran Can Help If Plante & Moran is the document service provider, we will contact the employer to discuss the amendment process. We are available to discuss planning opportunities related to these final regulations even if we are not the document service provider.
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