|
Executive Oveview On July 17, 2003, the Treasury Department issued proposed regulations under Sections 401(k) and 401(m) of the Internal Revenue Code. The regulations confirm that tribal governments, unlike state and local governments, may sponsor 401(k) plans. In addition, the regulations centralize other IRS guidance and contain important information regarding items such as testing, funding, and safe harbors. |
Tribal Governments Permitted to Sponsor 401(k) Plans
In its proposed regulations dated July 17, 2003, the Treasury Department affirmed that tribal governments and corporations owned in whole or in part by an Indian tribal government are permitted to sponsor cash or deferred arrangements, commonly known as "401(k) plans." This change originally came about through the Small Business Job Protection Act of 1997 ("SBJPA"). The proposed regulations reiterate that, unlike state and local governments, Indian tribal governments are permitted to offer 401(k) plans.
Other Provisions
In addition to the above, the regulations primarily centralize many Internal Revenue Service notices, procedures, and opinions regarding changes in the law brought forth by SBJPA, the Tax Reform Act of 1997, and the Economic Growth and Tax Relief Reconciliation Act of 2001.
Despite their being over 200 pages, the proposed regulations provide few actual changes. Instead, the proposed rules clarify previous statutory changes and Internal Revenue Service guidance. Some of the significant provisions include:
- Employee Stock Ownership Plan ("ESOP") and Non-ESOP portion of plans may be aggregated for Actual Deferral Percentage ("ADP") testing (but not coverage);
- Some exceptions to the 12-month plan year requirement for safe harbor plans;
- A safe harbor plan is prohibited from using the ADP test in lieu of the safe harbor contribution;
- For safe harbor plans, elective or matching contributions of highly compensated employees ("HCEs") who are in more than one plan do not need to be aggregated with the other plans;
- For ADP and Actual Contribution Percentage testing, a plan may use current year data for one test and prior year data for the other test;
- HCE deferrals for all plans made during the same plan year are aggregated, instead of the prior rule that aggregated deferrals for all plans that ended in the same calendar year;
- Cash or deferred arrangements exclude ESOP arrangements that permit participants to elect reinvestment of dividends on company stock;
- A requirement to distribute gap period earnings on distributions of excess deferrals;
- Qualified Nonelective Contributions ("QNECs") may not be counted twice for testing; for example, the same QNEC may not be double counted when a plan changes from current year testing to prior year testing;
- The "bottom-up" leveling method to pass the ADP test is restricted; and
- An employer may not accelerate its income tax deduction by prefunding elective deferrals.
The proposed regulations are effective for plan years beginning 12 months after the date of the final regulations.
If you have any questions please contact one of the members of our Tribal Governments Practice Group or the HR Law Department listed on the following page.
Copyright 2003 Gardner Carton & Douglas
This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.
