The final regulations provide that employees of governmental entities who are barred from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees in coverage testing if more than 95% of the employees of the employer who are not barred from being eligible employees benefit under the plan for the year.
Extending provisions of the Economic Growth Tax Relief and Recovery Act (EGTRRA) section 664, the final regulations also provide that employees of a section 501(c)(3) organization who are eligible to make contributions under a section 403(b) plan may be treated as excludable with respect to coverage testing for a section 401(k) plan, or a section 401(m) plan provided under the same general arrangement as a section 401(k) plan, if:
- No employee of a section 501(c)(3) organization is eligible to participate in such section 401(k) plan or section 401(m) plan; and
- At least 95% of the employees who are neither employees of a section 501(c)(3) organization nor employees of a governmental entity who are precluded from being eligible employees under a section 401(k) plan are eligible to participate in such section 401(k) plan or section 401(m) plan.
This portion of the finalized regulations differs from the IRS proposed regulations in that section 664 of EGTRRA considers employees of any section 501(c)(3) organization, and the IRS proposed regulations had considered only employees of the particular organization performing coverage testing. The IRS and Treasury Department concluded that their simplification of the statutory language might not in all cases result in the same employees being excludible as would be excludible by applying the statutory language.
The regulations apply to plan years beginning after December 31, 1996. Prior to the enactment of the Small Business Job Protection Act of 1996 (SBJPA), both governmental and tax-exempt entities generally were precluded from maintaining section 401(k) plans. SBJPA allowed for non-governmental tax-exempt organizations (including organizations exempt under section 501(c)(3)) to maintain section 401(k) plans.
The final regulations, published July 21, 2006, can be read here .
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