The government yesterday issued a comprehensive new set of rules to govern the operation of 401(k) and similar retirement savings plans, generally making them easier for employers to run and more attractive to higher-paid workers.
The rules announced by the Treasury Department and Internal Revenue Service implement more than a decade's worth of legislative changes, many meant to address employer complaints that anti-discrimination laws, enacted during the 1980s, made the plans too difficult to administer.
Those laws were designed to prevent companies from favoring top management over rank-and-file workers in the amount they could contribute each year. This sometimes forced employers to give back contributions late in the year, causing headaches for the company and a tax hit for the workers.
"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" for favorable tax treatment, the Treasury Department said in a statement.
Employer representatives agreed.
"There were certainly some helpful provisions" on the anti-discrimination tests, said Jan Jacobson, director of retirement policy for the American Benefits Council, an employer group.
For example, employers that find they have allowed high-paid workers to contribute too much will have more flexibility in undoing their error.
Also, Jacobson said, while the rules become fully effective beginning in 2006, employers can choose to implement them sooner, in some cases for this year.
However, she noted, the rules did not do everything employers had requested. For example, employers will generally be barred from pre-funding their 401(k) contributions, something that, if allowed, would have enabled them to accelerate tax deductions.
The new rules also closed what some had regarded as a loophole in the anti-discrimination test. Using it, employers could make contributions to a few very low-paid workers -- such as those hired late in the year -- to pass the test.
On the employee side, the rules also expanded slightly the list of hardships for which workers will be allowed to withdraw money early without penalty. Now included will be funeral expenses and repair of a primary residence. Currently, Jacobson said, the rules allow a withdrawal for the purchase of a new residence, but not to fix it. "This [change] would help people hit by those hurricanes in Florida," she said.
