Final 401(k) Regulations
By Joe Rankin & Bruce Delbecq
Employee Benefits Alert, November 2005


Opportunity

On December 29, 2004, the Internal Revenue Service issued final regulations governing 401(k) plans. These final regulations update and consolidate changes affecting 401(k) plans that were made after 1994.

• Plan documents must specify the nondiscrimination testing alternative that will be used as well as alternatives for other testing.
• Safe harbor hardship criteria may now include expenses to repair the employee’s principal residence and funeral expenses.
• If the plan allows and an employer or employee chooses to categorize certain employee contributions as employer contributions and the employee makes an irrevocable election to not have them treated as a cash or deferred election, the employee must make the irrevocable election before first becoming eligible under a plan.
• Employers have the ability to automatically enroll employees into a 401(k) plan at any contribution level so long as the employees have an effective opportunity to opt out of the plan.
• For a plan to be considered a safe harbor plan and to avoid certain nondiscrimination testing, safe harbor provisions must be adopted prior to the beginning of the plan year, and the safe harbor provisions must remain in effect throughout the entire plan year, with limited exceptions.