IRS issues guidance on 401(k) safe harbor rules
✍ Scribed by Dennis-Escoffier, Shirley
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 50 KB
- Volume
- 10
- Category
- Article
- ISSN
- 1044-8136
No coin nor oath required. For personal study only.
✦ Synopsis
She previously worked in public accounting and for several corporations. She has published numerous articles in tax journals.
IRS Issues Guidance on 401(k) Safe Harbor Rules
IRS
173 S ince the passage of the Small Business Jobs Protection Act of 1996, there were dreams in deferred compensation circles of the day that 401(k) plans would meet the contribution safe harbor provisions of the Act eliminating the annual chore of nondiscrimination testing. Now that the Internal Revenue Service (IRS) has issued its long-awaited guidance on these safe harbor rules, it is being greeted with mixed reactions.
Beginning in 1999, it is possible to design a 401(k) plan so that it is not subject to the burdensome average deferral percentage or average contribution percentage tests of the Internal Revenue Code. Plans that meet the safe harbor rules will reduce administrative costs by avoiding the need to conduct these tests. Additionally, highly compensated employees will know at the beginning of the plan year the maximum elective contributions and matching contributions that can be contributed on their behalf, preventing the need to make corrective distributions to these employees when the tests are not passed. However, some experts now complain that these rules are too onerous and that few employers will be interested in upgrading their 401(k) plans to qualify for the safe harbors. Thus, it is important for anyone considering adoption of these rules to look carefully before leaping into the safe harbor waters.