n-01-56.pdf

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Part III -- Administrative, Procedural and Miscellaneous
Effective Dates for Certain Amendments Made by the Economic Growth and Tax Relief
Reconciliation Act of 2001
Notice 2001-56
I. Purpose
This notice provides guidance relating to the effective dates for §§ 611(c), 613, and
636(a) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L.
107-16. Section 611(c) of EGTRRA increases the compensation limit of § 401(a)(17) of the
Internal Revenue Code (Code) and related sections. Section 613 of EGTRRA modifies the
rules in § 416 of the Code regarding determination of top-heavy status. Section 636(a) of
EGTRRA directs the Secretary to revise the regulations relating to hardship distributions under
§ 401(k)(2)(B)(i)(IV) of the Code.
Notice 2001-42, 2001-30 I.R.B. 70, provides a remedial amendment period for EGTRRA,
in which any needed retroactive remedial EGTRRA plan amendments may be adopted. The
availability of the EGTRRA remedial amendment period is conditioned on the timely adoption of
required good faith EGTRRA plan amendments. See Notice 2001-57, page [insert page #],
this bulletin, for sample good faith amendments. Although a good faith plan amendment need
not reflect all guidance issued under EGTRRA, the plan’s operation must be consistent with that
guidance, beginning with the effective date of that guidance.
II. Compensation Limit under § 401(a)(17)
A. Background
Section 401(a)(17) of the Code limits the annual compensation that may be taken into
account for purposes of determining a participant’s benefit accruals under a defined benefit plan
or a participant’s allocations under a defined contribution plan. Section 401(a)(17) also limits
the annual compensation that may be taken into account for purposes of certain
nondiscrimination requirements, including those in §§ 401(a)(4), 401(a)(5), 401(l), 401(k),
401(m), 403(b)(12), 404(a)(2), and 410(b)(2), and for purposes of determining whether a
definition of compensation is nondiscriminatory under § 414(s)(3). Under § 401(a)(17) as in
effect prior to the effective date of the EGTRRA amendment, the compensation limit is
$150,000, indexed in $10,000 increments for cost-of-living adjustments. For 2001, the
compensation limit is $170,000. A higher compensation limit applies to eligible participants in
certain governmental plans. See Treas. Reg. § 1.401(a)(17)-1(d)(4)(ii).
Section 611(c) of EGTRRA amended § 401(a)(17) of the Code by increasing the
$150,000 limit (as adjusted) to $200,000, and changing the method used for cost-of-living
adjustments. Section 611(c) of EGTRRA made similar amendments to §§ 404(l), 408(k), and
505(b)(7) of the Code.

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B.Effective Date
Section 611(i)(1) of EGTRRA provides that the increase in the compensation limit of
§ 401(a)(17) of the Code applies to years beginning after December 31, 2001. Thus, for
purposes of determining benefit accruals or the amount of allocations for plan years beginning
on or after January 1, 2002, compensation taken into account may not exceed the
compensation limit under § 401(a)(17), as amended by § 611(c) of EGTRRA. In the case of a
plan that uses annual compensation for periods prior to the first plan year beginning on or after
January 1, 2002, to determine accruals or allocations for a plan year beginning on or after
January 1, 2002, the plan is permitted to provide that the $200,000 compensation limit applies
to annual compensation for such prior periods in determining such accruals or allocations.
The compensation limit under § 401(a)(17) of the Code is adjusted for cost-of-living
increases in accordance with § 401(a)(17)(B), as amended by EGTRRA, as of the beginning of
a calendar year. As under pre-EGTRRA law, any such increases shall apply only with respect
to annual compensation during the plan year or other 12-month period over which
compensation is determined that begins with or within such calendar year (and any subsequent
calendar year).
Example. B is a participant in a nongovernmental defined benefit plan, Plan A. Plan A
has a calendar plan year, and a benefit formula that provides for an annual benefit at
normal retirement age equal to the product of: (years of service) x (1 percent) x (high 3-
year average compensation). For this purpose, high 3-year average compensation is
the average of the compensation over the 3 consecutive plan years for which the
average is the highest, and compensation for each year is limited to $150,000, as
adjusted for cost-of-living increases. As of December 31, 2001, B has 10 years of
service and compensation of $250,000 for each of the 3 years 1999, 2000, and 2001.
B’s high 3-year average compensation of $166,667 is determined as the average of
annual compensation (as limited by § 401(a)(17) of the Code) of $160,000 for 1999,
$170,000 for 2000, and $170,000 for 2001. B’s annual benefit under the plan formula as
of December 31, 2001, is $16,667, calculated as (10) x (.01) x ($166,667).
In 2002, Plan A is amended (1) to use the $200,000 compensation limit for
compensation paid in years beginning after December 31, 2001, and (2) to use the
$200,000 compensation limit for compensation paid in years beginning prior to January
1, 2002, in determining benefit accruals in years beginning after December 31, 2001. B
has annual compensation of $250,000 for 2002. A high 3-year average compensation of
$200,000 is determined for B as of December 31, 2002, as the average of annual
compensation (as limited by § 401(a)(17) of the Code, as amended by EGTRRA) of
$200,000 for 2000, $200,000 for 2001, and $200,000 for 2002. As of December 31,
2002, B’s annual benefit under the plan formula is $22,000, calculated as (11) x (.01) x
($200,000).
Plan A is not required to implement the EGTRRA increase in the compensation limit
under § 401(a)(17) of the Code in its benefit formula. Plan A could retain the
compensation limit in effect prior to EGTRRA, or provide for any other compensation
limit that is less than the compensation limit as amended by EGTRRA. Accordingly,
Plan A could be amended to provide that the increased compensation limit applies only
to annual compensation paid in plan years beginning on or after January 1, 2002. In that
case, a high 3-year average compensation of $180,000 would be determined for B as of
December 31, 2002, as the average of annual compensation of $170,000 for 2000 and

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$170,000 for 2001 (both as limited by § 401(a)(17) of the Code, as in effect prior to
amendment by EGTRRA), and $200,000 for 2002 (as limited by § 401(a)(17) of the
Code, as amended by EGTRRA). B’s annual benefit as of December 31, 2002, would be
$19,800, calculated as (11) x (.01) x ($180,000).
III. Determination of Top-Heavy Status under § 416
A. Background
Section 416(a) of the Code provides that a plan that is a top-heavy plan for a plan year
must satisfy the vesting and minimum benefit requirements of § 416(b) and (c) for the plan year.
A defined benefit plan is a top-heavy plan for a plan year if, as of the determination date, the
present value of the cumulative accrued benefits under the plan for key employees exceeds 60
percent of the present value of the cumulative accrued benefits under the plan for all
employees. A defined contribution plan is a top-heavy plan for a plan year if, as of the
determination date, the aggregate of the accounts of key employees under the plan exceeds 60
percent of the aggregate of the accounts of all employees under the plan. The determination
date with respect to any plan year is the last day of the preceding plan year or, in the case of the
first plan year of a plan, the last day of such plan year. The determination of whether a plan is
top-heavy is made in accordance with the requirements of § 416(g) (including the aggregation
requirements of § 416(g)(2)).
Section 613 of EGTRRA amended several provisions of § 416 of the Code, including
provisions related to the requirements for determining whether a plan is a top-heavy plan for a
plan year. Section 613(a) of EGTRRA modified the definition of “key employee” in § 416(i)(1)
of the Code by increasing the compensation threshold for determining when officers are key
employees to $130,000 and by eliminating the ten employees owning the largest interests in the
employer as a separate category of key employees. Section 613(c) of EGTRRA also provides
that the determination of key employee status is made based on the plan year ending on the
determination date, thereby eliminating the additional 4-year lookback period for determining
key employee status. In general, § 613(c) of EGTRRA modified §§ 416(g)(3) and 416(g)(4)(E)
of the Code to exclude from the determination of top-heavy status (1) distributions made prior to
the 1-year period ending on the determination date (except that a 5-year period is retained for
in-service distributions) and (2) the accrued benefits and account balances of employees who
performed no service for the employer during the 1-year period ending on the determination
date.
B. Effective Date
Section 613(f) of EGTRRA provides that the amendments made by § 613 apply to years
beginning after December 31, 2001. Thus, the EGTRRA amendments to § 416 of the Code
apply for purposes of determining whether a plan is top-heavy for the first plan year beginning
after December 31, 2001, even though the determination date for that plan year is before the
effective date of the EGTRRA amendment.
Thus, for example, for a plan with a calendar plan year (other than a plan in its first plan
year), the determination of whether the plan is top-heavy for the plan year beginning January 1,
2002, is made as of December 31, 2001. This determination is made in accordance with the
provisions of § 416 of the Code, as amended by EGTRRA. For example, for purposes of
identifying key employees in accordance with § 416(i)(1)(A) of the Code as amended by
EGTRRA, officers with annual compensation greater than $130,000 for 2001 are key

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employees, and the additional 4-year lookback period does not apply for purposes of that
determination.
IV. Hardship Distributions
A. Background
Elective deferrals under a qualified cash or deferred arrangement subject to § 401(k) of
the Code may not be distributable to participants prior to the occurrence of one of the events
specified in § 401(k)(2). One of these events is a hardship of the employee. Treas. Reg.
§ 1.401(k)-1(d)(2)(i) provides that a distribution is treated as made on account of an employee’s
hardship if it is made on account of an immediate and heavy financial need and is necessary to
satisfy the financial need. Treas. Reg. § 1.401(k)-1(d)(2)(iv)(B) provides a safe harbor pursuant
to which a distribution is deemed necessary to satisfy an immediate and heavy financial need.
One of the requirements of the safe harbor is that the employee is prohibited from making
elective contributions and employee contributions under the plan and all other plans maintained
by the employer for at least 12 months after receipt of the hardship distribution. See Treas.
Reg. § 1.401(k)-1(d)(2)(iv)(B)(4).
Sections 401(k)(12) and 401(m)(11) of the Code provide design-based safe harbor
methods for satisfying the actual deferral percentage (ADP) test contained in § 401(k)(3)(A)(ii)
and the actual contribution percentage (ACP) test contained in § 401(m)(2) based on matching
contributions that meet certain conditions and that satisfy certain notice requirements. Notice
98-52, 1998-2 C.B. 634, provides that a plan will not fail to satisfy the ADP matching
contribution safe harbor merely because an eligible employee’s ability to make elective deferrals
is suspended for 12 months following a hardship distribution. Notice 98-52 also provides that a
plan will not fail to satisfy the ACP matching contribution safe harbor merely because an eligible
employee’s ability to make elective deferrals and employee contributions is suspended for 12
months following a hardship distribution. See Treas. Reg. § 1.401(k)-1(d)(2)(iv)(B)(4) and
sections V.B.1.c.iv and VI.B of Notice 98-52.
Section 636(a) of EGTRRA directs the Secretary of the Treasury to modify the
regulations regarding hardship distributions to provide that the period during which an employee
is prohibited from making elective deferrals in order for the distribution to be deemed necessary
to satisfy a financial need shall be 6 months (instead of 12 months).
B. Effective Date
Section 636(a) of EGTRRA provides that the regulations as revised in accordance with
§ 636(a) shall apply to years beginning after December 31, 2001. Thus, the revised regulations
will be effective for calendar years beginning after December 31, 2001, rather than effective only
with respect to hardship distributions received after December 31, 2001. For example, a plan
that provides for hardship distributions in accordance with the safe harbor in Treas. Reg.
§ 1.401(k)-1(d)(2)(iv)(B) may be amended to provide that an employee who receives a hardship
distribution in 2001 is prohibited from making elective deferrals and employee contributions for 6
months after receipt of the distribution (or until January 1, 2002, if later). However, a plan
sponsor generally could retain its existing suspension period for all hardship distributions (or for
all hardship distributions prior to January 1, 2002).
However, in order to continue to rely on the matching contribution safe harbor in
§ 401(k)(12) or § 401(m)(11) of the Code to satisfy the ADP or ACP test, a plan must reduce the

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period during which elective deferrals and employee contributions are suspended following a
hardship distribution from 12 months to 6 months for calendar years beginning after December
31, 2001. A plan will not fail to satisfy this requirement merely because it provides that the
reduction from 12 months to 6 months applies only to hardship distributions made after
December 31, 2001.
V. Effect on Other Documents
Notice 98-52 is modified.
DRAFTING INFORMATION
The principal author of this notice is Ann Trichilo of the Employee Plans, Tax Exempt
and Government Entities Division. For further information regarding this notice, please contact
the Employee Plans’ taxpayer assistance telephone service at (202) 283-9516 or (202) 283-
9517, between the hours of 1:30 p.m. and 3:30 p.m. Eastern Time, Monday through Thursday.
Ms. Trichilo may be reached at (202) 283-9695. These telephone numbers are not toll-free.