Section 401(k) of Title 26 -
Internal Revenue Code
(k) Cash or deferred arrangements
(k)(1) General rule
A profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan shall
not be considered as not satisfying the requirements of subsection (a) merely because the plan includes
a qualified cash or deferred arrangement.
(k)(2) Qualified cash or deferred arrangement
A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock
bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of
subsection (a) -
- (A) under which a covered employee may elect to have the employer make payments as contributions to
a trust under the plan on behalf of the employee, or to the employee directly in cash;
- (B) under which amounts held by the trust which are attributable to employer contributions made
pursuant to the employee's election -
- (i) may not be distributable to participants or other beneficiaries earlier than -
- (I) separation from service, death, or disability,
- (II) an event described in paragraph (10),
- (III) in the case of a profit-sharing or stock bonus plan, the attainment of age 59 1/2, or
- (IV) in the case of contributions to a profit-sharing or stock bonus plan to which section 402(a)(8)
applies, upon hardship of the employee, and
(ii) will not be distributable merely by reason of the completion of a stated period of
participation or the lapse of a fixed number of years;
(C) which provides that an employee's right to his accrued benefit derived from employer
contributions made to the trust pursuant to his election is nonforfeitable, and
(D) which does not require, as a condition of participation in the arrangement, that an employee
complete a period of service with the employer (or employers) maintaining the plan extending beyond the
period permitted under section 410(a)(1) (determined without regard to subparagraph (B)(i) thereof).
(k)(3) Application of participation and discrimination standards
- (A) A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement
unless -
- (i) those employees eligible to benefit under the arrangement satisfy the provisions of section
410(b)(1), and
- (ii) the actual deferral percentage for eligible highly compensated employees (as defined in
paragraph (5)) for such year bears a relationship to the actual deferral percentage for all other
eligible employees for such plan year which meets either of the following tests:
- (I) The actual deferral percentage for the group of eligible highly compensated employees is not
more than the actual deferral percentage of all other eligible employees multiplied by 1.25.
- (II) The excess of the actual deferral percentage for the group of eligible highly compensated
employees over that of all other eligible employees is not more than 2 percentage points, and the actual
deferral percentage for the group of eligible highly compensated employees is not more than the actual
deferral percentage of all other eligible employees multiplied by 2.
If 2 or more plans which include cash or deferred arrangements
are considered as 1 plan for purposes of section 401(a)(4) or
410(b), the cash or deferred arrangements included in such
plans shall be treated as 1 arrangement for purposes of this
subparagraph.
If any highly compensated employee is a participant under 2 or
more cash or deferred arrangements of the employer, for
purposes of determining the deferral percentage with respect to
such employee, all such cash or deferred arrangements shall be
treated as 1 cash or deferred arrangement.
(B) For purposes of subparagraph (A), the actual deferral percentage for a specified group of
employees for a plan year shall be the average of the ratios (calculated separately for each employee in
such group) of -
- (i) the amount of employer contributions actually paid over to the trust on behalf of each such
employee for such plan year, to
- (ii) the employee's compensation for such plan year.
(C) A cash or deferred arrangement shall be treated as meeting the requirements of subsection (a)(4)
with respect to contributions if the requirements of subparagraph (A)(ii) are met.
(D) For purposes of subparagraph (B), the employer contributions on behalf of any employee -
- (i) shall include any employer contributions made pursuant to the employee's election under
paragraph (2), and
- (ii) under such rules as the Secretary may prescribe, may, at the election of the employer, include
-
- (I) matching contributions (as defined in 401(m)(4)(A)) which meet the requirements of paragraph
(2)(B) and (C), and
- (II) qualified nonelective contributions (within the meaning of section 401(m)(4)(C)).
(k)(4) Other requirements
(k)(4)(A) Benefits (other than matching contributions) must not be contingent on election to
defer
A cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred
arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to
have the employer make or not make contributions under the arrangement in lieu of receiving cash. The
preceding sentence shall not apply to any matching contribution (as defined in section 401(m)) made by
reason of such an election.
(k)(4)(B) State and local governments and tax-exempt organizations not eligible
A cash or deferred arrangement shall not be treated as a qualified cash or deferred arrangement if it is
part of a plan maintained by -
- (i) a State or local government or political subdivision thereof, or any agency or instrumentality
thereof, or
- (ii) any organization exempt from tax under this subtitle.
This subparagraph shall not apply to a rural cooperative plan.
(k)(4)(C) Coordination with other plans
Except as provided in section 401(m), any employer contribution made pursuant to an employee's election
under a qualified cash or deferred arrangement shall not be taken into account for purposes of
determining whether any other plan meets the requirements of section 401(a) or 410(b). This subparagraph
shall not apply for purposes of determining whether a plan meets the average benefit requirement of
section 410(b)(2)(A)(ii).
(k)(5) Highly compensated employee
For purposes of this subsection, the term 'highly compensated employee' has the meaning given such term
by section 414(q).
(k)(6) Pre-ERISA money purchase plan
For purposes of this subsection, the term 'pre-ERISA money purchase plan' means a pension plan -
- (A) which is a defined contribution plan (as defined in section 414(i)),
- (B) which was in existence on June 27, 1974, and which, on such date, included a salary reduction
arrangement, and
- (C) under which neither the employee contributions nor the employer contributions may exceed the
levels provided for by the contribution formula in effect under the plan on such date.
(k)(7) Rural cooperative plan
For purposes of this subsection -
(k)(7)(A) In general
The term 'rural cooperative plan' means any pension plan -
- (i) which is a defined contribution plan (as defined in section 414(i)), and
- (ii) which is established and maintained by a rural cooperative.
(k)(7)(B) Rural cooperative defined
For purposes of subparagraph (A), the term 'rural cooperative' means -
- (i) any organization which -
- (I) is exempt from tax under this subtitle or which is a State or local government or political
subdivision thereof (or agency or instrumentality thereof), and
- (II) is engaged primarily in providing electric service on a mutual or cooperative basis,
(ii) any organization described in paragraph (4) or (6) of section 501(c) and at least 80 percent of
the members of which are organizations described in clause (i),
(iii) a cooperative telephone company described in section 501(c)(12), and
(iv) an organization which is a national association of organizations described in clause (i), (ii),
or (iii).
(k)(8) Arrangement not disqualified if excess contributions distributed
(k)(8)(A) In general
A cash or deferred arrangement shall not be treated as failing to meet the requirements of clause (ii)
of paragraph (3)(A) for any plan year if, before the close of the following plan year -
- (i) the amount of the excess contributions for such plan year (and any income allocable to such
contributions) is distributed, or
- (ii) to the extent provided in regulations, the employee elects to treat the amount of the excess
contributions as an amount distributed to the employee and then contributed by the employee to the plan.
Any distribution of excess contributions (and income) may be made without regard to any other
provision
of law.
(k)(8)(B) Excess contributions
For purposes of subparagraph (A), the term 'excess contributions' means, with respect to any plan year,
the excess of -
- (i) the aggregate amount of employer contributions actually paid over to the trust on behalf of
highly compensated employees for such plan year, over
- (ii) the maximum amount of such contributions permitted under the limitations of clause (ii) of
paragraph (3)(A) (determined by reducing contributions made on behalf of highly compensated employees in
order of the actual deferral percentages beginning with the highest of such percentages).
(k)(8)(C) Method of distributing excess contributions
Any distribution of the excess contributions for any plan year shall be made to highly compensated
employees on the basis of the respective portions of the excess contributions attributable to each of
such employees.
(k)(8)(D) Additional tax under section 72(t) not to apply
No tax shall be imposed under section 72(t) on any amount required to be distributed under this
paragraph.
(k)(8)(E) Treatment of matching contributions forfeited by reason of excess deferral or
contribution
For purposes of paragraph (2)(C), a matching contribution (within the meaning of subsection (m)) shall
not be treated as forfeitable merely because such contribution is forfeitable if the contribution to
which the matching contribution relates is treated as an excess contribution under subparagraph (B), an
excess deferral under section 402(g)(2)(A), or an excess aggregate contribution under section
401(m)(6)(B).
(k)(8)(F) Cross reference
For excise tax on certain excess contributions, see section 4979.
(k)(9) Compensation
For purposes of this subsection, the term 'compensation' has the meaning given such term by section
414(s).
(k)(10) Distributions upon termination of plan or disposition of assets or
subsidiary
(k)(10)(A) In general
The following events are described in this paragraph:
(k)(10)(A)(i) Termination
The termination of the plan without establishment or maintenance of another defined contribution plan
(other than an employee stock ownership plan as defined in section 4975(e)(7)).
(k)(10)(A)(ii) Disposition of assets
The disposition by a corporation of substantially all of the assets (within the meaning of section
409(d)(2)) used by such corporation in a trade or business of such corporation, but only with respect to
an employee who continues employment with the corporation acquiring such assets.
(k)(10)(A)(iii) Disposition of subsidiary
The disposition by a corporation of such corporation's interest in a subsidiary (within the meaning of
section 409(d)(3)), but only with respect to an employee who continues employment with such subsidiary.
(k)(10)(B) Distributions must be lump sum distributions
(k)(10)(B)(i) In general
An event shall not be treated as described in subparagraph (A) with respect to any employee unless the
employee receives a lump sum distribution by reason of the event.
(k)(10)(B)(ii) Lump sum distribution
For purposes of this subparagraph, the term 'lump sum distribution' has the meaning given such term by
section 402(e)(4), without regard to clauses (i), (ii), (iii), and (iv) of subparagraph (A),
subparagraph (B), or subparagraph (H) thereof.
(k)(10)(C) Transferor corporation must maintain plan
An event shall not be treated as described in clause (ii) or (iii) of subparagraph (A) unless the
transferor corporation continues to maintain the plan after the disposition.