Regulations describe hardship withdrawals and complex nondiscrimination tests

Article Abstract:

Hardship withdrawal of elective contributions to a 401(k) plan may be made because of an employee's immediate and heavy financial need, and the distribution must be necessary to satisfy that need. Medical expenses, purchase of a principal residence, payment of tuition, and payments to prevent eviction from a principal residence or to prevent foreclosure on the mortgage of a principal residence all constitute safe harbors for establishing such financial need. Elective contributions may also be distributed upon such occurrences as termination of the plan without establishment of a successor plan, or disposition of at least 85 percent of the assets used by the corporation in a trade or business. Nondiscrimination tests, excess aggregate contributions, miscellaneous requirements, and effective dates for 401(k) plans are discussed.

Salary reduction savings plans, 401K plans

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TRA has new limits on plan benefits, allocations and covered compensation, as well as ESOP changes

Article Abstract:

Under the Tax Reform Act (TRA) of 1986, there will be new limits on the maximum benefits payable under a defined benefit plan. The maximum allocation allowed under defined-contribution plans will be frozen at $30,000 or 25 percent of annual pay, whichever is less, until cost of living adjustments increase the dollar limitation of defined benefit plans from $90,000 to $120,000. The $200,000 limitation on considered compensation is extended to all plans under Section 401(a)(17) of the Internal Revenue Code, and the $200,000 limitation will be used to determine deductions as well as benefits. A 10 percent excise tax will be imposed on reversions from qualified plans occurring after 1985. The Act also repeals the tax credit for contributions to employee stock ownership plans (ESOP).

Analysis, Stocks, Tax reform, Employee ownership

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Rules for after-tax contributions, vesting, and distributions changed by the new law

Article Abstract:

Under the Tax Reform Act of 1986, the ability of employees to make after-tax contributions to qualified plans will be restricted, and withdrawals of after-tax contributions prior to the annuity starting date will be taxed. The new law will result in faster vesting; members of pension plans other than multi-employer plans must be 100 percent vested after five years of service or vested according to a new seven-year schedule. The new tax rules that apply to distributions of benefits and uniform distributions under employer-provided pension and profit-sharing plans are also discussed.

Finance, taxation, & monetary policy, Laws, regulations and rules, Tax accounting, Deferred income (Business), Deferred income, Profit sharing

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