Treasury and IRS Issue New Rules for 401(k) Plans
On Tuesday, the Treasury Department and the IRS issued final regulations governing 401(k) plans. The 401(k) plan is the most common type of employer-sponsored retirement plan, providing retirement income security for millions of American workers and their families.
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The regulations apply to plans that permit employees to make pre-tax contributions and to plans that have employer matching contributions or employee after-tax contributions.
The existing regulations covering these plans were last updated in 1994. Since then, there have been significant statutory changes. Proposed regulations to comply with these changes were published on July 17, 2003.
These comprehensive final rules are the result of a long effort of gathering input from retirement plan participants, sponsors, and service providers.
Specifically, they address many of the concerns raised by comments submitted in response to the proposed regulations. These final regulations will make it easier for employers to sponsor plans to help employees save for their retirement and will assist administrators in keeping the plans qualified.
The final regulations update and simplify many of the current rules for 401(k) plans. In addition, the new regulations strengthen the nondiscrimination rules that ensure benefits for rank-and-file employees. The regulations require certain employer contributions to be spread over a large group of rank-and-file employees before they can boost the ability of high-paid employees to defer income under the plan.
The regulations published this week will be fully effective for plan years that begin on or after January 1, 2006, although employers are permitted to use these new rules for any plan year that ends after December 28, 2004.
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