A 401(k) with a profit sharing contribution allows the profit sharing contribution to be used for cross-testing, and the plan sponsor can make a qualified non-elective contribution (QNEC) by vesting part or all of the profit sharing contributions if the plan fails actual deferral percentage (ADP) testing.
The non-elective contribution option requires that the company contribute 2% of every employee''s earned income to the plan on the employee''s behalf regardless of whether or not the employee contributes to the plan himself.
401(k)-1(f), (1) the plan must make corrective distributions to the HCEs to bring their ADP ratio into compliance with the tests, (2) the plan sponsor may elect to recharacterize some of the excess contributions as after-tax employee contributions (resulting in additional taxable income to HCEs), (3) the plan sponsor may make additional contributions to the plan that are allocated to non-HCE accounts as qualified non-elective contributions and/or qualified matching contributions or (4) some combination of these techniques may be used.
With regard to required matching and non-elective contributions under a QACA, the final regulations clarify that these contributions are ineligible for a hardship withdrawal.
Pursuant to Section 403(b), employer non-elective contributions (including matching contributions) and pre-tax elective deferrals to a Section 403(b) plan will be excluded from gross income.
In this newsletter, we discuss the most salient features of this guidance and its effect on the following areas: Hardship Distributions For Nonspouse Beneficiaries Nonspousal Plan Rollovers to IRAs Shorter Required Vesting Schedule For Employer Non-elective Contributions Notice and Consent Rules Related to Distributions Interest Rates Used in Computing DB Plan Benefit Limits Hardship Distributions For Nonspouse Beneficiaries Contributions to 401(k), 403(b), 457(b) and deferred compensation plans can only be distributed upon certain events, one of which is an employee hardship.
Faster Vesting of Employer Non-Elective Contributions Beginning with contributions for plan years that begin after December 31, 2006, employer nonelective contributions cannot be subject to a vesting schedule this is longer than a three-year cliff or six-year graded schedule.
The plan sponsor generally must make either (i) a non-elective contribution on behalf of all non-highly compensated employees eligible to participate in the plan, without regard to whether such employees make a contribution under the plan, in an amount equal to at least 3% of compensation or (ii) a matching contribution on behalf of all non-highly compensated employees covered under the plan equal to (a) 100% of the elective contributions up to 1% of compensation, plus (b) 50% of the elective contributions from 1% to 6% of compensation.
