4.72.3  Employee Contributions and Matching Contributions

Manual Transmittal

March 03, 2015

Purpose

(1) This transmits revised IRM 4.72.3, Employee Plans Technical Guidelines, Employee Contributions and Matching Contributions.

Material Changes

(1) IRM 4.72.3.1, Overview of Section 3, is retitled Overview.

(2) IRM 4.73.3.2, Recent Changes to Section 401(m) Plans, is retitled Recent Changes to IRC 401(m) Plans.

(3) IRM 4.72.3.4, Summary of Section 401(m) Plan Requirements, is retitled Summary of IRC 401(m) Plan Requirements.

(4) IRM 4.72.3.6.1.7, IRC section 4979 Tax, is retitled IRC 4979 Tax.

(5) IRM 4.72.3.7, SIMPLE 401(k) Plans, is retitled SIMPLE IRC 401(k) Plans.

(6) IRM 4.72.3.8, Safe Harbor 401(k) Plans, is retitled Safe Harbor IRC 401(k) Plans.

(7) Substantially revised, clarified, and reorganized content throughout. Made editorial updates, updated links and improved the content flow.

Effect on Other Documents

This supersedes IRM 4.72.3, Employee Plans Technical Guidelines, Employee Contributions and Matching Contributions, dated June 7, 2010.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(03-03-2015)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

4.72.3.1  (03-03-2015)
Overview

  1. This IRM section is designed to assist Employee Plans (EP) examiners in identifying relevant issues relating to plans that offer employee contributions or matching contributions (an "IRC 401(m) plan" ) for plan years beginning after December 31, 2001.

  2. Most plans covered by IRC 401(m) will also contain a cash or deferred arrangement (CODA). See IRM 4.72.2, Employee Plans Technical Guidance, Cash or Deferred Arrangements (CODAs). This IRM section has a similar structure to IRM 4.72.2, sometimes resulting in duplicative material. Also, most CODA-related guidance issued by the Service will include guidance relevant to IRC 401(m) plans, so this IRM section will often reference guidance that is directed mainly at CODAs.

  3. This IRM section reflects statutory changes made by the:

    1. Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L.107-16

    2. Pension Protection Act of 2006 (PPA), Pub. L. 109-280

    3. Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Pub. L 110-458

    4. Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART), Pub. L 110-245.

  4. No statutory changes have been made to IRC 401(m) since PPA and through the date of this IRM section. In addition, this IRM section also reflects all relevant guidance issued by the Service prior to the date of this IRM section.

4.72.3.2  (03-03-2015)
Recent Changes to IRC 401(m) Plans

  1. The statutes listed in IRM 4.72.3.1, Overview, made the changes listed in (2), (3), (4), (5) and (6) below.

  2. Effective in 2002:

    1. Section 631 of EGTRRA added IRC 414(v) to provide for additional catch-up contributions for individuals age 50 or over.

    2. Section 666 of EGTRRA amended IRC 401(m)(9) to eliminate the multiple use test.

    3. Section 633 of EGTRRA added IRC 411(a)(2) (obsoleted by section 904(a) of PPA), requiring faster vesting for matching contributions: either three year cliff or six year graded.

    4. Section 613(b) of EGTRRA amended IRC 416(c)(2)(A) to say that matching contributions are taken into account for purposes of satisfying the top heavy minimum contribution requirement.

    5. Section 613(d) of EGTRRA added IRC 416(g)(4)(H) to exempt certain safe harbor IRC 401(k) plans from the top heavy rules.

  3. Effective in 2006:

    1. Section 617 of EGTRRA added IRC 402A to provide for designated Roth contributions.

    2. Section 861(a)(1) of PPA amended IRC 401(a)(5)(G) to say that all governmental plans within the meaning of IRC 414(d) are treated as meeting the participation and nondiscrimination requirements of IRC 401(a)(3) and (4). Prior to this change, only state and local government plans were so treated. Since governmental plans (within the meaning of IRC 414(d)) which have employee or matching contributions automatically satisfy IRC 401(a)(4), there is no need for them to satisfy IRC 401(m).

  4. Section 904 of PPA amended IRC 411(a), effective in 2007, requiring faster vesting of employer nonelective contributions to defined contribution plans. Three year cliff and two to six year graded vesting replaces five year cliff and three to seven year graded vesting.

  5. Effective in 2008:

    1. Section 902(a) and (b) of PPA added IRC 401(k)(13) and IRC 401(m)(12) permitting qualified automatic contribution arrangements (QACAs) as alternative means of satisfying the ADP and ACP tests.

    2. Section 902(d) of PPA added IRC 414(w) providing for eligible automatic contribution arrangements (EACAs). Section 902(d) also amended IRC 401(k)(8)(E) and IRC 411(a)(3)(G) to allow the forfeiture of matching contributions associated with permissible withdrawals under IRC 414(w).

    3. Section 902(e)(3)(B) of PPA amended IRC 401(k)(8)(A)(i) and IRC 401(m)(6)(A) to say that a corrective distribution of excess contributions and excess aggregate contributions cannot include earnings from the end of the year in which the excess arose to the date of distribution ("gap-period earnings" ). Section 902(e)(3)(A) made a coordinating change to IRC 4979(f)(1).

    4. Section 902(e)(2) of PPA amended IRC 4979(f)(2) to say that a distribution of excess contributions or excess aggregate contributions, plus attributable earnings on each, is includible in the recipient’s gross income in the year distributed.

  6. Section 903(a) of PPA added IRC 414(x), effective in 2010, providing for "eligible combined plans." An eligible combined plan, sometimes referred to as a "DB-K plan" or similar name, is a plan consisting of a defined benefit plan that meets certain specified benefit and vesting requirements and a CODA that meets certain specified contribution, vesting, nondiscrimination and notice requirements.

  7. In addition to the statutory changes, the Service released the following guidance on IRC 401(m) plans in the last few years:

    1. Rev. Proc. 2004-13, 2004-1 C.B. 485, gives guidance on IRC 416(g)(4)(H) on whether certain safe harbor 401(k) plans are subject to the top heavy rules.

    2. Treasury regulations for IRC 401(k) and IRC 401(m) were published on December 29, 2004 (69 FR 78144).

    3. Treasury regulations for IRC 401(k) and IRC 401(m) were published on January 3, 2006 (71 FR 6), giving guidance on designated Roth contributions for plan qualification purposes.

    4. Treasury regulations for IRC 410(b) were published on July 21, 2006 (71 FR 41357), permitting the exclusion of certain employees of a tax-exempt organization described in IRC 501(c)(3) for purposes of determining whether an IRC 401(m) plan (or an IRC 401(k) plan) meets the requirements for minimum coverage specified in IRC 410(b).

    5. Treasury regulations on QACAs and EACAs were published on February 24, 2009 (74 FR 8200).

    6. Treasury regulations for IRC 401(k) and IRC 401(m) were published on November 15, 2013 (78 FR 68735), expanding the reasons for suspending safe harbor contributions in a safe harbor IRC 401(k) plan (IRC 401(k)(12)) or a QACA (IRC 401(k)(13)).

4.72.3.3  (03-03-2015)
Common Abbreviations and Definitions

  1. Elective contributions (ECs) are the contributions made to a plan by an employee’s CODA election. ECs can be treated as matching contributions and used in the average contribution percentage (ACP) test if the average deferral percentage (ADP) test is first satisfied using all ECs and continues to be satisfied after exclusion of those ECs used in the ACP test.

  2. Employee contributions, sometimes referred to as "after-tax" employee contributions are plan contributions from employees, either mandatory (meaning they are required to receive some benefit from the employer, such as matching contributions) or voluntary, that are allocated to a separate account. These contributions are treated at the time of contribution as after-tax employee contributions. The term does not include designated Roth contributions, loan repayments, repayments for the buy-back of cashed-out benefits (see IRC 411(a)(7)(C)), or amounts that are transferred or rolled over from another plan or IRA.

  3. Matching contributions are employer contributions made to a defined contribution plan on account of an employee’s employee contributions or elective contributions. The term also includes forfeitures allocated on the basis of matching contributions, employee contributions or elective contributions.

  4. Actual deferral ratio (ADR) is an employee’s ECs (and amounts treated as ECs) for a plan year divided by the employee’s compensation for the plan year.

  5. Actual deferral percentage (ADP) is the average of the ADRs for the relevant group of employees. It is used in discussions about the ADP test, a non-discrimination test contained in IRC 401(k)(3)(A)(ii).

  6. Actual contribution ratio (ACR) is the sum of an employee’s employee contributions and matching contributions (and amounts treated as matching contributions) for a plan year divided by the employee’s compensation for the plan year.

  7. Actual contribution percentage (ACP) is the average of the ACR for the relevant group of employees. It is used in discussions about the ACP test, a non-discrimination test contained in IRC 401(m)(2)(A).

  8. Qualified nonelective contributions (QNECs) or sometimes qualified nonelective contributions (QNCs) are special employer contributions that are not subject to a cash or deferred election. They are always fully vested and are subject to certain distribution restrictions. They may be treated as ECs or matching contributions in the ADP test or ACP test.

  9. Qualified matching contributions (QMACs) are employer matching contributions that are always fully vested and are subject to certain distribution restrictions. They are counted in the ACP test unless they are treated as ECs, in which case they are counted in the ADP test. If the only matching contributions in a plan containing a CODA were QMACs, and no employee contributions were permitted, the plan only needs to perform the ADP test. The ACP test is not necessary.

  10. Automatic contribution arrangement (ACA) (also known as automatic enrollment) is a feature in a retirement plan that allows an employer to "enroll" a covered employee in the employer’s plan unless the employee affirmatively elects otherwise. "Enroll" means that part of the employee’s wages are contributed to the retirement plan on the employee’s behalf as elective contributions.

  11. Qualified automatic contribution arrangement (QACA) is a type of ACA described in IRC 401(k)(13). A QACA has certain minimum contribution requirements and is not subject to the ADP test, nor to the ACP test if additional requirements in IRC 401(m)(12) are satisfied.

  12. Eligible automatic contribution arrangement (EACA) is a type of ACA described in IRC 414(w). An EACA may permit covered employees who meet certain requirements to withdraw amounts contributed under a default election.

  13. Safe harbor IRC 401(k) plan, as used in this IRM 4.72.3, means a plan that meets the requirements of IRC 401(k)(12) and, depending on the context in which used, IRC 401(m)(11).

4.72.3.4  (03-03-2015)
Summary of IRC 401(m) Plan Requirements

  1. If a plan provides for employee contributions or matching contributions, it must satisfy the requirements of both IRC 401(m) and IRC 401(a). In this text such a plan is referred to as an "IRC 401(m) plan," whether or not any other types of contributions are stated in the plan. In the Treasury regulations, an "IRC 401(m) plan" means only the portion of a plan that consists of employee contributions and employer matching contributions.

  2. Essentially, the only requirement imposed by IRC 401(m) is the ACP test, which, if passed, will satisfy the nondiscrimination requirement of IRC 401(a)(4) with respect to the amount of employee contributions and employer matching contributions.

  3. In addition to the ACP test, an IRC 401(m) plan must satisfy the requirements of IRC 401(a)(4) relating to benefits, rights and features. For example, the right to make each level of employee contributions and the right to each level of matching contributions under the plan are benefits, rights or features subject to the requirements of IRC 401(a)(4). See Treas. Reg. 1.401(a)(4)-4(e)(3)(i) and (iii)(F) through (G).

  4. Treas. Reg. 1.410(b)-7(c) states that the portion of a plan consisting of employee and matching contributions must separately satisfy the IRC 410(b) coverage requirements.

  5. Employee contributions and attributable earnings must be non-forfeitable at all times. However, matching contributions (other than QMACs) may be subject to a vesting schedule. But the plan may forfeit vested matching contributions, including QMACs, if the contributions to which they relate are treated as either of the following:

    1. Excess deferrals (deferrals in excess of the IRC 402(g) limit)

    2. Excess contributions (deferrals over the ADP test limit)

    3. Excess aggregate contributions (amounts in excess of the ACP test limit)

    4. A permissible withdrawal under IRC 414(w)

    Note:

    See IRC 401(k)(8)(E), IRC 411(a)(3)(G) and Treas. Reg. 1.414(w)-1(c).

4.72.3.5  (03-03-2015)
Coverage and Participation

  1. The portion of the plan consisting of employee contributions and employer matching contributions, by itself, must satisfy one of the IRC 410(b) coverage tests, either the ratio percentage test or the average benefits test. To satisfy the ratio percentage test, such portion may be aggregated with a similar portion in the same or another plan if it has the same plan year, uses the same testing method (prior year or current year) and may be permissively aggregated. See Treas. Reg. 1.410(b).

  2. Each employee who is eligible to make an employee contribution or receive a matching contribution (an "eligible employee" ) is treated as "benefiting" (i.e., covered), regardless of whether the employee elects to make employee contributions or have deferrals made on his or her behalf (and, potentially, receive matching contributions on these amounts). The term "eligible employee" also includes certain employees who are temporarily prohibited under the plan from making contributions, such as a suspension following a hardship distribution. See IRM 4.72.3.6.1, ACP Test.

  3. Treas. Reg. 1.401(a)(4)-11(g)(3) states that IRC 401(k) and IRC 401(m) plans may be retroactively amended to extend eligibility to employees for coverage purposes within 101/1 months after the plan year in which there is a coverage problem. Per Treas. Reg. 1.401(a)(4)-11(g)(3), if a plan needs to add some nonhighly compensated employees (NHCEs) to satisfy IRC 410(b), the employer must make a QNEC contribution to each of the added employees equal to the average of the ACRs of NHCEs who were eligible. This retroactive correction feature cannot be used to correct other defects, such as a failure to satisfy the ACP test.

  4. Employees covered by a collective bargaining agreement must be disaggregated from employees not covered by a collective bargaining agreement for purposes of the ACP test. Separate collective bargaining units within the same plan may be disaggregated, but are not required to be, for purposes of the ACP test. The combination of bargaining units used for testing must be reasonable and reasonably consistent from year to year. Equivalent rules apply to multiemployer plans.

  5. Treas. Reg. 1.410(b)-7(c) relating to the mandatory disaggregation of ESOP and non-ESOP portions of a plan do not apply to IRC 401(m) plans. Therefore, inspite of Treas. Reg. 1.410(b)-7(d)(2), (prohibiting permissive aggregation of plans or portions of plans that are mandatorily disaggregated), an ESOP and a non-ESOP are permitted to aggregate in applying the IRC 401(m) rules, even if the ESOP and non-ESOP are in different plans of the employer.

4.72.3.5.1  (06-07-2010)
Examination Tip

  1. Verify the portion of the plan that is subject to IRC 401(m) satisfies the coverage requirements of IRC 410(b).

4.72.3.6  (03-03-2015)
Nondiscrimination

  1. IRC 401(m)(2) states that an employer maintaining an IRC 401(m) plan must annually compare the employee and matching contributions of eligible HCEs to those made by eligible NHCEs. If certain limits are exceeded by the HCEs, the employer must take corrective action to bring the plan within the limits. This testing for nondiscrimination (the ACP test) is the exclusive nondiscrimination test for amounts of employee and matching contributions contributed to a plan. That is, this test is used instead of any IRC 401(a)(4) amounts testing. QNECs and elective contributions that are treated as matching contributions are also counted in the ACP test.

  2. Employee and matching contributions of a collectively bargained plan that automatically satisfies IRC 410(b) are treated as satisfying IRC 401(m). Also, a governmental plan, within the meaning of IRC 414(d), is exempt from the requirements of IRC 401(m). See IRC 401(a)(5)(G), Treas. Reg. 1.401(m)-1(b)(2), Treas, Reg. 1.401(a)(4)-1(c)(5) and Treas. Reg. 1.410(b)-2(b)(7).

  3. Instead of the ACP test, a plan may use any of the following:

    1. For plan years beginning after December 31, 1996, employers could adopt SIMPLE IRC 401(k) plans, modeled after SIMPLE IRA plans described in IRC 408(p). See IRC 401(k)(11) and IRC 401(m)(10).

    2. For plan years beginning after December 31, 1998, employers could adopt safe harbor IRC 401(k) plans described in IRC 401(k)(12) and IRC 401(m)(11).

    3. For plan years beginning after December 31, 2007, employers could adopt a QACA described in IRC 401(k)(13) and IRC 401(m)(12).

  4. Although an IRC 401(m) plan must satisfy the ACP test (or be deemed to satisfy the ACP test because it is part of a SIMPLE IRC 401(k) plan, a safe harbor IRC 401(k) plan, or a QACA with respect to the amount of employee and matching contributions, the right to make each level of employee contributions and the right to each level of matching contributions is a benefit, right or feature that must satisfy the nondiscriminatory availability requirement of Treas. Reg. 1.401(a)(4)-4(e)(3).

  5. A plan that fails the ACP test does not meet the IRC 401(a) qualified plan requirements.

4.72.3.6.1  (03-03-2015)
ACP Test

  1. IRC 401(m)(2)(A) states that the ACP of the eligible HCEs cannot exceed the greater of:

    1. 1.25 time the ACP of the eligible NHCEs

    2. The lesser of two plus the ACP of the eligible NHCEs or two times the ACP of the eligible NHCEs

  2. The ACP for a group (either HCE or NHCE) is the average of the individual ACRs of the particular group. An eligible employee's ACR is the sum of the employee and matching contributions and QNECs and elective contributions that are treated as matching contributions allocated to the employee's account in the plan divided by the employee's compensation. ACRs and ACPs, expressed as a percentage, must be rounded to the nearest one-hundredth of a percent. If the only eligible employees in the plan are HCEs, the plan automatically passes the ACP test.

  3. Only "eligible employees" are included in the ACP test. ("Eligible employees" are also counted as "benefiting" for purposes of satisfying the IRC 410(b) coverage requirements.) An "eligible employee" is one who is eligible under the plan to make an employee contribution or to receive an allocation of matching contributions, whether or not the employee actually makes any employee contributions or receives any matching contributions. If an eligible employee chooses not to make employee contributions, and no matching contributions (or elective contributions or QNECs treated as matching contributions) are allocated to the employee's accounts, the employee must be included in the ACP test with an ACR of zero. "Eligible employee" also includes an employee who:

    1. Must perform purely ministerial or mechanical acts in order to make an employee contribution or receive an allocation of matching contributions.

    2. Has been suspended from making employee contributions under the plan (e.g., for having taken a hardship distribution).

    3. May not make additional employee contributions or receive additional employer contributions because of the limits imposed by IRC 415(c).

  4. An employee who cannot make employee contributions or receive matching contributions because he or she was given a one-time election when the employee commenced employment with the employer or upon first becoming eligible under any IRC 401(m) plan of the employer and elected not to be eligible to make employee contributions or receive an allocation of matching contributions for the duration of employment with the employer is not an eligible employee.

  5. The ACP test is performed on the plan level, so identification of the "plan" is the first step to be performed. See IRM 4.72.3.5, Coverage and Participation.

  6. If a plan is disaggregated into separate plans for purposes of IRC 410(b), the portion consisting of employee and matching contributions must also be disaggregated.

    Example:

    If a plan covers all employees, but, for testing purposes the plan is disaggregated into two plans, one covering employees who have less than one year of service or are less than age 21, and one covering all other employees, the employer would run two ACP tests, one for the employees with less than one year of service or less than age 21, and the other for all other employees.

  7. IRC 401(m)(5)(C) states a special rule for early participation. Under certain conditions, an employer may exclude from the ACP test all eligible employees (other than HCEs) who have not met the minimum age and service requirements of IRC 410(a)(1)(A). A similar rule applies for purposes of the ADP test.

  8. If a HCE is eligible to participate in more than one plan of an employer to which employee or matching contributions may be made, the HCE's contributions for all such plans of the employer must be combined to determine the HCE's ACR. This combination ACR is then used in the ACP test for each plan. If the Plan is a safe harbor plan, see IRM 4.72.2.13.2, Special Compensation Definition for Safe Harbor Plans, for the definition of compensation that must be used.

  9. The compensation used to calculate ACRs is limited to the IRC 401(a)(17) amount and must also satisfy IRC 414(s). The definition of compensation used by the plan must be nondiscriminatory, and elective deferrals may be included or excluded from the definition.

  10. Contributions on behalf of HCEs that exceed the limits imposed by the ADP test are called excess contributions. That is, they are the amount of contributions used to calculate the HCE ADP that exceeds the amount of such contributions permitted if the ADP test were passed. A plan must dispose of excess contributions by distributing them to certain HCEs or recharacterizing them as employee after-tax contributions. Recharacterized amounts are then counted in the ACP test.

  11. Contributions on behalf of HCEs that exceed the limits imposed by the ACP test are called excess aggregate contributions. That is, they are the amount of contributions used to calculate the HCE ACP that exceeds the amount of such contributions permitted if the ACP test were passed. A plan must dispose of excess aggregate contributions by distributing them to certain HCEs or forfeiting certain matching contributions. QNECs and certain elective contributions contributed on behalf of NHCEs can be used to raise the NHCE ACP, thereby reducing or eliminating HCE contributions that might otherwise become excess aggregate contributions.

  12. The plan document must specify whether the ACP test will be performed by comparing the HCE ACP for a plan year with the NHCE ACP for the same plan year ("current year testing" ) or by comparing the HCE ACP for a plan year with the NHCE ACP for the prior plan year (" prior year testing" ).

4.72.3.6.1.1  (03-03-2015)
Current Year Testing

  1. Under the current year testing method, the applicable year for determining the ACP for eligible NHCEs is the same plan year as the plan year for which the ACP test is being performed. Employee contributions of an employee are taken into account for a plan year in current year ACP testing for the plan year in which they are made to the trust. A payment to an agent of the plan, such as the employer, is at that time treated as made to the trust if the agent remits such funds to the trust within a reasonable time after receipt.

    Note:

    Under Department of Labor regulations, employee contributions must be paid into the trust by the earliest date such contributions can reasonably be segregated from the employer's general assets, with a safe harbor for small plans. See DOL Regs. 2510.3-102.

  2. Excess contributions that are recharacterized as employee contributions are taken into account for the plan year in which the excess contribution is included in the HCE's gross income.

  3. Matching contributions are taken into account in determining the ACR for an eligible employee for a plan year only if:

    1. They are allocated to the employee’s account as of a date within the plan year per the terms of the plan.

    2. They are paid to the trust no later than 12 months after the close of the plan year.

    3. They are made on account of the employee’s elective contributions or employee contributions for the plan year.

  4. Matching contributions that do not meet the requirements in IRM 4.72.3.6.1.1 (3) above may not be taken into account in the ACP test for the plan year the contributions were made, or for any other plan year. Such contributions must satisfy the requirements of IRC 401(a)(4) (without regard to the ACP test) for the plan year they are allocated under the plan as if they were nonelective contributions and were the only nonelective contributions allocated for that year. See Treas. Reg. 1.401(m)-2(a)(5)(i), Treas. Reg. 1.401(a)(4)-1(b)(2)(ii)(B) and Treas. Reg.1.410(b)-7(c)(1).

  5. A matching contribution is not counted in the ACP test if it is forfeited because the related contribution is treated as any of the following:

    1. An excess deferral

    2. An excess contribution

    3. An excess aggregate contribution

    4. A permissible withdrawal under IRC 414(w)

    Note:

    QMACs used in the ADP test are not counted in the ACP test.

  6. QNECs and QMACs may not be used in the ADP/ACP test if they are large when compared to the recipient’s compensation. This is to prevent the abuses arising from so-called targeted QNECs and QMACs. Targeted QNECs and QMACs (sometimes called "bottom-up leveling" ) is the practice of giving a large QNEC or QMAC to one or more of the lowest paid NHCEs to raise the NHCE ADP/ACP so that more can be deferred or contributed to HCEs.

    Example:

    Giving a $1,000 QNEC to a NHCE who made just $1,000 raises the ADP of 50 NHCEs by two percent, enabling a dozen well-paid HCEs to contribute an additional $78,000 (or more) for themselves.

  7. If a QNEC exceeds five percent of the employee’s compensation (or a QMAC exceeds the greater of five percent of compensation or the amount of the employee’s elective contribution) it can only be counted in the ADP/ACP test if it is not more than two times a representative rate as defined in the Treasury regulations. See Treas. Reg. 1.401(k)-2(a)(6)(iv) and (v) and Treas. Reg. 1-401(m)-2(a)(5)(ii) published December 29, 2004.

  8. In calculating the ACR for an eligible employee for a plan year or applicable year an employer may take into account QNECs in the ACP test. See IRC 401(m)(3). To do this, the contributions must allocate to the employee’s account as of the date within that year both of the below are satisfied:

    1. The elective contribution satisfies Teas. Reg. 1.401(k)-2(a)(4)(i) and the ADP test in Treas. Reg. 1.401(k)-2(a)(1).

    2. The amount of QNEC satisfies the requirements of IRC 401(a)(4).

    Note:

    See Treas. Reg. 1.401(k)-2(a)(4)(i)(A) for the meaning of "as of the date within that year."

  9. IRC 401(m)(3), says that an employer may take into account elective contributions in calculating the ACP, but the ADP test must be passed both with and without the elective contributions used in the ACP test.

    Note:

    QNECs and QMACs made after the tax return filing date are not deductible for the prior taxable year. These contributions are counted, with other employer contributions, against the IRC 404 deduction limits for the year made.

4.72.3.6.1.2  (03-03-2015)
Prior Year Testing

  1. Under the prior year testing method, the applicable year for determining the ACP for the eligible NHCEs is the plan year immediately preceding the plan year for which the ACP test is being calculated.

  2. Generally, the rules that apply to calculating ACRs and ACPs in current year testing also apply to prior year testing. Prior year testing simplifies plan administration because an employer can determine the percentage of employee and matching contributions that can be made on behalf of HCEs early in the plan year and have more time to plan for correction. Consider the following:

    Example:

    Employer X maintains an IRC 401(m) plan that says distribution of excess aggregate contributions is the only method the plan can use to correct ACP test failures. The plan has a calendar-year plan year, uses the current year testing method and both HCEs and NHCEs make employee contributions to the plan. In January 2010, Employer X determines that the plan fails the ACP test for 2009, and that a corrective distribution of excess aggregate contributions must be made to appropriate HCEs by March 15, 2010, to avoid all penalties.

    Example:

    Same facts as above, except that the plan is using the prior year testing method. The ACP for the NHCEs for 2008 under the plan can be determined early in 2009 by Employer X because it has obtained the necessary data on prior year NHCE status, contributions and compensation by January 2009. This simplifies plan administration for Employer X.

  3. The eligible employees taken into account in determining the prior year's ACP for NHCEs are those eligible employees who were NHCEs during the preceding year, without regard to the employee's status in the testing year. A special rule applies for the first plan year. The first plan year of any plan (other than a successor plan), the amount taken into account as the ACP for NHCEs for the preceding plan year is deemed to be three percent, unless an election is made to use the actual ACP data for the first plan year.

    Example:

    Employee A was employed by Employer X and was an NHCE in Year One. Employee A no longer works for Employer X in Year Two. For purposes of determining the prior year's ACP for Employer X's IRC 401(m) plan for the Year Two testing year, Employee A is taken into account. The result would be the same if Employee A were still employed by Employer X but had become a HCE in Year Two.

  4. The plan must contain language that specifically states the testing methods it is using. The plan can use either:

    1. Current year testing

    2. Prior year testing

  5. If using prior year testing, the plan must state if the NHCEs’ ACP for the first year is three percent or the first year’s ACP. See Treas. Reg. 1.401(m)-1(c)(2).

4.72.3.6.1.2.1  (03-03-2015)
Use of QNECs and QMACs in Prior Year Testing

  1. To be taken into account for the NHCE ACP for the prior year, a QNEC or QMAC must be allocated to the employee's account as of a date within that year. The QNEC or QMAC must be paid to the trust by the end of the 12-month period following the end of that prior year. This means the QNEC or QMAC must be paid to the trust by the end of the testing year. Therefore, if using prior year testing an employer cannot use QNECs or QMACs to correct a failed ACP or ADP test. This is because the employer won’t know until after the testing year has ended whether or not the ACP or ADP test is failed. The deadline for making corrective QNECs and QMACs would have passed. Of course QNECs and QMACs made prior to the deadline can be counted. See Treas. Reg. 1.401(k)-2(a)(4)(i)(A) for the meaning of "as of a date within that year."

    Example:

    A plan uses the prior year testing method for the 2009 testing year. QMACs that are allocated to NHCEs' accounts as of the last day of the 2008 plan year may be taken into account in calculating the ACP only if those QMACs are actually contributed to the plan by the last day of the 2009 plan year.

    Note:

    This 12-month rule does not change the rule under IRC 415, that employer contributions shall not be deemed credited to a participant's account for a particular limitation year unless the contributions are actually made no later than 30 days after the end of the IRC 404(a)(6) period applicable to the taxable year with or within which the particular limitation year ends. See Treas. Reg.1.415(c)-1(b)(6)(i)(B).

4.72.3.6.1.2.2  (03-03-2015)
First-Year Rule for Prior Year Testing

  1. For the first plan year of a plan (other than a "successor plan," see below) that uses prior year testing, the ACP for NHCEs for the prior year is deemed to be three percent or, if specified in the plan document, the NHCE ACP is equal to the NHCE ACP for that first plan year (i.e., the current year). See IRC 401(m)(3) and Treas. Reg. 1.401(m)-2(c)(2).

  2. For ACP testing purposes, the "first plan year" is the first year in which the plan offers employee or matching contributions. A plan does not have a first plan year if for that year it is aggregated per the Treasury regulations with any other plan that provided for employee or matching contributions in the prior year.

  3. A plan is a "successor plan" if 50 percent or more of the eligible employees for the first plan year were eligible employees under another IRC 401(m) plan maintained by the employer in the prior year.

4.72.3.6.1.2.3  (06-07-2010)
Changes in the Group of NHCEs in Prior Year Testing

  1. In general, under the prior year testing method, subsequent changes in the group of NHCEs are disregarded. That is, the ACP for NHCEs for the prior year is determined with respect to eligible employees who were NHCEs in that prior year, and without regard to changes in the group of eligible NHCEs in the testing year. This is true even though some NHCEs in the prior year have become HCEs in the testing year, or are no longer eligible employees under the plan. It is also true even though some NHCEs in the testing year were not eligible employees in the prior year.

  2. However, if a plan results from or is affected by a "plan coverage change" that becomes effective during the testing year then the NHCE ACP for the prior year is the weighted average of the ACPs for the prior year subgroups. A "plan coverage change" is a change in the group(s) of eligible employees on account of any of the following:

    1. The establishment or amendment of a plan.

    2. A plan merger, consolidation, or spin off under IRC 414(I).

    3. A change in the way plans are (or are not) permissively aggregated under Treas. Reg. 1.410(b)-7(d).

    4. A reclassification of employees that has the same effect as amending the plan.

    5. Any combination of the above.

  3. A "prior year subgroup" is all NHCEs for the prior year who were eligible employees under a specific IRC 401(m) plan maintained by the employer, and who would have been eligible employees under the plan being tested if the plan coverage change had been effective as of the first day of the prior year.

  4. The "weighted average of the ACPs for the prior year subgroups" is the sum for all prior year subgroups of the "adjusted ACPs."

  5. The "adjusted ACP" for each prior year subgroup is the ACP for the prior year for all NHCEs of the specific plan under which the members of the prior year subgroup were eligible employees, multiplied by a fraction, the numerator of which is the number of NHCEs in the prior year subgroup, and the denominator of which is the total number of NHCEs in all prior year subgroups.

  6. Optional rule for minor plan coverage change: If there is a plan coverage change, and 90 percent or more of all NHCEs from all prior year subgroups are from a single prior year subgroup, then the employer may elect to use the prior year ACP for NHCEs of the plan that included that single prior year subgroup. See Treas. Reg. 1.401(m)-2(c)(4)(ii).

4.72.3.6.1.3  (06-07-2010)
Changing Testing Method

  1. A plan that uses the prior year testing method may adopt the current year testing method for any subsequent testing year. Notification to or prior approval of the Service is not required for the election to be valid. However, the employer may wish to apply for a determination letter on the plan amendment needed to implement the change. A plan that is a safe harbor IRC 401(k) plan, a QACA or a SIMPLE IRC 401(k) plan is treated as using the current year testing method.

  2. A plan that uses current year testing is permitted to change to prior year testing in three situations described in Treas. Reg. 1.401(k)-2(c)(1)(ii).

    1. The plan is not the result of the aggregation of two or more plans, and current year testing was used for each of the five plan years preceding the year of the change (or, if lesser, the number of years the plan has been in existence).

    2. The plan is the result of the aggregation of two or more plans, and for each of the aggregated plans current year testing was used for each of the five plan years preceding the year of the change (or, if lesser, the number of years the plan has been in existence).

    3. A transaction occurs that is described in IRC 410(b)(6)(C)(i) (i.e., the employer becomes or ceases to be a member of an IRC 414(b), (c), (m) or (o) group) and, as a result, the employer maintains both a plan using prior year testing and a plan using current year testing, and the change occurs within the transition period described in IRC 410(b)(6)(C)(ii) (i.e., by the last day of the 1st plan year beginning after the transaction).

4.72.3.6.1.4  (03-03-2015)
Limits on Double Counting of Certain Contributions

  1. When a plan changes from current year testing to prior year testing, contributions on behalf of many, if not all, NHCEs are likely to be double counted.

    Example:

    If a plan used current year testing in 2008, and then changed to prior year testing in 2009, employee contributions on behalf of NHCEs for 2008 will be counted twice; once in 2008 in calculating the NHCE ACP under the current year testing method, and again in 2009 in calculating the NHCE ACP under the prior year testing method.

  2. To limit double counting, Treas. Reg. 1.401(m)-2(a)(6)(vi) states that QNECs cannot be used in prior year testing if they were used in current year testing in the preceding year.

4.72.3.6.1.5  (06-07-2010)
Plan Provisions Regarding Testing Method

  1. A plan must state that the nondiscrimination requirements of IRC 401(m) will be met and must specify which of the two testing methods (current year or prior year) it is using. If the employer changes the testing method under a plan, the plan must be amended to reflect the change.

  2. The IRC 401(k) and IRC 401(m) Treasury regulations permit a plan to incorporate by reference the nondiscrimination tests in IRC 401(k)(3) and IRC 401(m)(2). A plan that incorporates these provisions by reference may continue to do so, but must specify which of the two testing methods (current year or prior year) it is using. Further, for purposes of the first plan year rule, a plan that incorporates these provisions by reference must specify whether the ADP/ACP for NHCEs is three percent or the current year's ADP/ACP. See Treas. Reg. 1.401(k)-1(e)(7) and Treas. Reg. 1.401(m)-1(c)(2).

4.72.3.6.1.6  (03-03-2015)
Correction of ACP Test

  1. The IRC 401(m) Treasury regulations give two methods to correct excess aggregate contributions:

    1. Making QMACs or QNECs

    2. Distributing or forfeiting the amounts in excess of the ACP limits

  2. A plan may use a combination of these methods to avoid or correct excess aggregate contributions. Alternatively, a plan may contain provisions that limit employee contributions or matching contributions in a manner that prevent excess aggregate contributions from occurring.

  3. Excess aggregate contributions may not be corrected by:

    1. Forfeiting vested matching contributions.

    2. Distributing non-vested matching contributions.

    3. Re-characterizing matching contributions.

    4. Not making matching contributions required under the terms of the plan.

  4. Excess aggregate contributions for a plan year may not remain unallocated or be allocated to a suspense account for allocation to one or more employees in any future year. In addition, excess aggregate contributions may not be corrected using the retroactive correction rules of Treas. Reg. 1.401(a)(4)-11(g). See Treas. Reg. 1.401(m)-2(b)(1)(iii) and Treas. Reg. 1.401(a)(4)-11(g)(3)(vii) and (5).

  5. If corrective QNECs or QMACs (for IRC 401(m) plans using current year testing) do not bring the plan within the ACP limits, the plan must distribute the excess aggregate contributions along with attributable earnings and/or forfeit excess aggregate contributions that are matching contributions, according to the terms of the plan. If a plan corrects by distributing employee contributions, any associated match must also be distributed (or forfeited) to prevent the plan from failing the current and effective availability requirement of Treas. Reg. 1.401(a)(4)-4(e)(3) with respect to the remaining matching contributions.

  6. If the ACP test is not corrected within the 12-month period following the end of the failed plan year, the plan is not qualified.

4.72.3.6.1.6.1  (06-07-2010)
Determination of Excess Aggregate Contributions

  1. Excess aggregate contributions are the aggregate amount of matching contributions and employee contributions made to the plan on behalf of HCEs for a plan year over the maximum amount of such contributions permitted under the ACP test. Excess aggregate contributions are determined after first determining the amount of excess deferrals (if any) and then determining the amount of excess contributions (if any).

  2. The amount of excess aggregate contributions is determined using a leveling method based on HCEs' ACRs, beginning with the HCE with the highest percent-age and continuing in descending order of ACR percentages until the target HCE ACP is reached. The sum of all reductions for all HCEs is the total amount of excess aggregate contributions for the plan year. (See below.)

4.72.3.6.1.6.2  (03-03-2015)
Distribution of Excess Aggregate Contributions

  1. Correction through distribution involves a four-step process:

    1. Determine the total amount of excess aggregate contributions that must be distributed under the plan.

    2. Apportion the total amount of excess aggregate contributions among the HCEs.

    3. Determine the income allocable to excess aggregate contributions.

    4. Distribute the apportioned contributions, together with allocable income (or forfeit the apportioned matching contributions, if forfeitable).

  2. The amount of excess aggregate contributions is the amount of matching contributions and employee contributions that would have to be returned to HCEs in order to pass the ACP test, starting with the HCE with the highest contribution percentage (ACR) and continuing, by leveling, to the HCE(s) with the next highest ACR(s) until the plan would pass the ACP test ("ratio leveling method" ). On the other hand, the identity of the HCEs who will actually have excess aggregate contributions distributed to them is determined based on the dollar amount of their contributions, beginning with the HCE with the largest dollar amount ("dollar leveling method" ).

    Example:

    A, B and C are HCEs; D, E and F are NHCEs. The plan matches 50 cents for every dollar of employee contributions and all employees are fully vested in their accounts. Under the ACP test, the greatest acceptable ACP for HCEs is 4.50 percent (2.50 percent +2 percent ). Since 5.54 percent is greater than 4.50 percent, there are excess aggregate contributions. The plan states that excess aggregate contributions will be distributed or, if forfeitable, forfeited.

    Employee Compensation Employee
    Contribution
    Match ACR ACP
    A $100,000 $4,000 $2,000 6.00 percent  
    B $90,000 $3,900 $1,950 6.50 percent 5.4 percent
    C $80,000 $2,200 $1,100 4.13 percent  
    D $20,000 $1,000 $500 7.50 percent  
    E $10,000 0 0 0 2.5 percent
    F $10,000 0 0 0  


    In determining the amount of excess aggregate contributions, the proper procedure is to hypothetically reduce the highest HCE ACR until the maximum allowed ADP (4.50 percent) is achieved, or until the next highest HCE ACR is reached, whichever occurs first.

    In this case, if B’s ACR is reduced to 6.00 percent, the ACP will be 5.38 percent. Since this is not sufficient to satisfy the ACP test, A’s and B’s ACRs must be further reduced to 4.69 percent to produce a HCE ADP of 4.50 percent (4.69 + 4.69 + 4.13 = 13.51; 13.51 ÷ 3 = 4.50).

    The excess aggregate contributions is the difference between the contributions at the old ACPs ($6,000 and $5,850) and the contributions at the new ACPs ($4,690 and $4,221), for a total amount of $2,939. This amount must then be distributed from the account(s) of the HCE with the highest dollar amount of contributions used in the ACP test for the plan year until the contributions remaining in such employee’s account equal the plan-year contributions in the HCE’s account(s) with the next highest dollar amount and so on until the total is distributed. Therefore, $150 must first be distributed to A, to make A’s contributions level with B’s, and the remaining amount of excess aggregate contributions, $2,789, is then allocated equally to A and B, so that each has $4,455.50 of employee and matching contributions remaining for the year. (Note that the ACP test is deemed passed after these corrections even though running the test then would not produce a passing average ACP for HCEs.)

  3. The distribution of excess aggregate contributions must include any allocable income. The income allocable to excess aggregate contributions includes income for the plan year for which the excess aggregate contributions were made and, for plan years beginning on or after January 1, 2006, and before January 1, 2008, for the period between the end of the plan year and the date of distribution (the "gap period" ). See Treas. Reg. 1.401(m)-2(b)(2)(iv).

  4. For plan years beginning on or after January 1, 2008, the income allocable to excess aggregate contributions is equal to the allocable gain or loss only through the end of the plan year.

  5. A failed ACP test can be corrected by distributing excess aggregate contributions, adjusted for earnings, to certain HCEs by no later than 12 months after the close of the testing year, regardless of whether the plan is using the prior year or current year testing method. However, if a distribution of an excess aggregate contribution is not made before the end of the 12 months following the end of the plan year in which they were made, the plan will fail to be qualified for the year in which the excess contributions were made and all subsequent years until corrected.

  6. In the event of a complete termination of the plan during the plan year in which an excess aggregate contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination.

  7. If excess aggregate contributions are not distributed within 21/1 months (six months in the case of certain EACAs) of the end of the plan year, the employer will be liable for a 10 percent excise tax on these contributions. See IRM 4.72.3.6.1.7, IRC 4979 Tax.

  8. For plan years beginning on or after January 1, 2008, a corrective distribution of excess aggregate contributions (and allocable income) is includible in the employee's gross income for the employee's taxable year in which distributed (except to the extent they consist of employee contributions or designated Roth contributions), and must be reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., using the appropriate code. Such distributions are not subject to the consent rules under IRC 411(a)(11) and IRC 417 nor to the early withdrawal tax. See Treas. Reg. 1.401(m)-2(b)(4)(i) for additional rules relating to the employer excise tax on amounts distributed more than 21/1 months (six months in the case of certain plans that include an EACA) after the end of the plan year. See Treas. Reg. 1.402(c)-2, Q&A-4, for restrictions on rolling over distributions that are excess aggregate contributions.

4.72.3.6.1.6.3  (06-07-2010)
Forfeiture of Excess Aggregate Contributions

  1. A plan can correct a failed ACP test by forfeiting matching contributions (but not employee contributions), plus attributable earnings. Vested matching contributions, including QMACs, can only be forfeited to correct for ACP if they relate to employee contributions that have been distributed as excess aggregate contributions, an unlikely scenario: most likely the plan would correct by distributing the minimum amount of employee contributions, together with the related vested match, until the ACP test is satisfied.

4.72.3.6.1.7  (03-03-2015)
IRC 4979 Tax

  1. IRC 4979 imposes a tax on the employer equal to 10 percent of any excess aggregate contributions not corrected within 21/1 months (six months in the case of certain EACAs) after the end of the plan year to which they relate. However, the tax does not apply if corrective QNECs or QMACs (current year testing plans only) are made within 12 months after the end of the plan year. If the QNECs or QMACs were insufficient to fully satisfy the ACP test, the tax will apply to the remaining excess aggregate contributions.

  2. The plan has 12 months after the end of the plan year being tested to correct excess aggregate contributions. The plan can distribute excess aggregate contributions any time during the 12-month period, but the employer will still be subject to the 10 percent tax if the distribution is made after the 21/1 months (or six month in the case of certain EACAs) period.

  3. The tax is reported on Form 5330, Return of Excise Taxes Related to Employee Benefit Plans and is due 15 months after the end of the plan year. See Treas Reg. 54.4979-1. Any extension of time to pay the tax is not an extension of time to correct the ACP test.

  4. The tax is a one-time tax, meaning, if excess aggregate contributions are not timely corrected for a plan year, the tax applies only for that year.

4.72.3.6.1.8  (03-03-2015)
Examination Steps

  1. Review the plan to determine if it permits employee and/or matching contributions. If so, verify that the plan contains language stating that the ACP test (IRC 401(m)(2)) will be met.

  2. If a DB plan has separate DC accounts for employee contributions, IRC 401(m) is applicable to these employee contributions.

  3. If the plan is a SIMPLE IRC 401(k) plan, a safe harbor IRC 401(k) plan or a QACA, review the plan language and verify the employer distributed the proper notices and made the required matching or nonelective contributions. For a QACA, verify that the plan satisfies the uniform minimum default contribution requirement. If the plan satisfies the requirements of IRC 401(m)(10), (11) or (12), the ACP test is not required. If the plan states that it is a SIMPLE IRC 401(k) plan, a safe harbor IRC 401(k) plan or a QACA, but in operation, the requirements of IRC 401(m)(10), (11), or (12) are not met, the plan cannot use the ACP test instead and the plan is not qualified.

  4. If it is necessary to run the ACP test, have the plan administrator explain the policy/procedures for ACP testing, including correction.

  5. Review financial audit reports and corporate minutes for comments on ACP testing and correction.

  6. Identify the employees who are eligible to make employee contributions and/or receive matching contributions.

  7. If an employee contribution is required as a condition of plan participation (i.e., a mandatory contribution) an employee who would be a participant in the plan if he or she made a contribution is treated as an eligible employee on behalf of whom no contributions are made. See IRC 401(m)(5)(B). This means a nonparticipant is taken into account in computing the contribution percentage. Since the nonparticipant contributes nothing, the amount of contributions that can be made on behalf of HCEs may be affected.

  8. Check the plan’s definition of compensation to determine whether it meets the requirements of Treas. Reg. 1.414(s)-1. If the Plan is a safe harbor plan, see IRM 4.72.2.13.2 for the definition of compensation that must be used.

  9. Verify employee contributions and/or matching contributions with source documents. Determine whether there has been any recharacterization of excess aggregate contributions.

  10. Analyze the testing methodology and results of the ACP test performed by the plan administrator, confirming the accuracy of the test. Ensue the data used in the test is for the correct year or years.

  11. If the plan is disaggregated under IRC 410(b), make sure the ACP test is also run separately on each disaggregated plan. Apply the aggregation and disaggregation rules of Treas. Reg. 1.410(b)-7 as modified by the IRC 401(m) regulations to find the plan (or plans) so that the ACP test can be applied to the proper employees. Make sure plans being aggregated are not prohibited from doing so. See Treas. Reg. 1.410(b)-7.

  12. Determine the HCE and NHCE groups.

  13. Determine the ACR for each individual HCE and NHCE being tested.

  14. Verify that the ACP for each group has been properly determined in accordance with the plan provisions describing the testing method (current year or prior year).

  15. If the ACP test is not met, verify the amount of excess aggregate contributions and determine proper and timely correction has taken place.

  16. To be included under the ACP test, make sure the employer takes into account for a plan year only those employee and matching contributions paid to the trust within the proper time frames.

  17. Determine whether any recharacterized excess contributions should have been included in the ACP test.

  18. Verify that the proper leveling method was used to determine the amount of excess aggregate contributions allocated to each HCE. Verify proper and timely correction.

  19. Verify that the method used to correct excess aggregate contributions was specified in the plan document, and that the document was followed.

  20. Establish whether the corrections were made in a timely manner, and included applicable gains or losses.

    1. If excesses were distributed, determine whether the distributions were made within 21/1 months after the end of the plan year in which the excess arose. If not, verify that the IRC 4979 tax was paid and Form 5330 filed. Regardless, the distribution must be made within 12 months after the close of the plan year.

    2. Determine if the employer properly reported the distribution of excess aggregate contributions as taxable income (other than employee contributions) to the participant on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. and whether the employee properly included the distribution on his or her return.

    3. Determine if forfeited matching contributions were reallocated to other participants’ accounts during the plan year. If so, for IRC 415 purposes, contributions are treated as annual additions for both the participants who receive them and the participants from whom the contributions are forfeited.

    4. Determine if QNECs satisfy IRC 401(a)(4) both before and after any are used in the ACP test. If elective contributions are used in the ACP test, make sure the ADP test is passed both before and after some are moved to the ACP.

    5. Check to see if a suspense account has been established to hold excess aggregate contributions or if such contributions remain unallocated. Treasury regulations for IRC 401(m) state that excess aggregate contributions may not remain unallocated or be allocated to a suspense account for allocation to one or more employees in any future year.

4.72.3.7  (03-03-2015)
SIMPLE IRC 401(k) Plans

  1. IRC 401(k)(11) and IRC 401(m)(10) provide for SIMPLE IRC 401(k) plans. SIMPLE IRC 401(k) plans must be maintained on a calendar-year basis. A SIMPLE IRC 401(k) plan is deemed to satisfy the ADP and ACP tests and is not subject to the top-heavy requirements. See IRM 4.72.2.12, SIMPLE IRC 401(k) Plans for details on SIMPLE IRC 401(k) plans.

4.72.3.8  (03-03-2015)
Safe Harbor IRC 401(k) Plans

  1. IRC 401(k)(12) and IRC 401(m)(11) provide a design-based safe harbor method under which a plan containing a CODA is treated as satisfying the ADP and ACP test if the arrangement meets certain contribution and notice requirements of Treas. Reg. 1.401(k)-3(a) through (h) and Treas. Reg. 1.401(m)-3(a) through (j).

  2. If the plan is a safe harbor IRC 401(k) plan, see IRM 4.72.2.13, Safe Harbor IRC 401(k) Plans.

4.72.3.9  (03-03-2015)
Qualified Automatic Contribution Arrangements

  1. A plan that meets the requirements of IRC 401(k)(13) and IRC 401(m)(12) is deemed to pass the ADP and ACP tests. Such a plan, or, more accurately, the arrangement within such a plan, is called a QACA. To be a QACA, the plan must provide for certain levels of automatic contributions, give certain matching or nonelective contributions and satisfy a notice requirement. See Treas. Reg. 1-401(k)-3 and Treas. Reg. 1.401(m)-3.

  2. For a plan containing a QACA, see IRM 4.72.2.14.1, Qualified Automatic Contribution Arrangements (QACAs), through IRM 4.72.2.14.5, QACAs Notice requirements.


More Internal Revenue Manual