n-02-4.pdf

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Part III. Administrative, Procedural, and Miscellaneous
Guidance on Certain Provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001
Notice 2002-4
I. PURPOSE
This notice provides guidance with respect to the effect on distributions from a
section 401(k) plan of §§ 636(a) and 646 of the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA"), Pub. L. 107-16. Section 636(a) of EGTRRA
provides that the Secretary shall revise the regulations relating to hardship distributions
under § 401(k)(2)(B)(i)(IV) of the Internal Revenue Code. Section 646 of EGTRRA
amends the provisions of Code § 401(k)(2) and (10) to permit a plan to provide for
distributions on severance from employment. This notice also provides guidance under
Code § 414(v), added by § 631 of EGTRRA, on the application of the universal
availability requirement under Code § 414(v)(4) in the case of an applicable employer
plan (within the meaning of § 414(v)(6)(A)) that is also qualified under Puerto Rico law
and provides a transition rule for satisfying the universal availability requirement for
2002.
Specifically this notice provides that:
• A plan may be amended to provide for distributions on severance from
employment under § 401(k)(2)(B)(i)(I), as amended by EGTRRA, on or after
January 1, 2002, regardless of whether the severance from employment
occurred before, on, or after January 1, 2002.
• Beginning in 2002, for a plan that uses the safe harbor hardship provisions of
§ 1.401(k)-1(d)(2)(iv)(B) of the Income Tax Regulations, the amount of elective
contributions that a participant is permitted to make in the year following a
hardship distribution is no longer required to be limited to the amount of elective
contributions permitted under Code § 402(g) for that year minus the amount of
the elective contributions made in the year of the hardship.
• A plan will not be treated as failing to satisfy the requirements of § 414(v)(4) for
2002 solely because different plans maintained by the same employer (as
defined in Regulations § 1.410(b)-9) adopt catch-up contributions beginning on
different dates during 2002, provided that all such plans begin offering catch-up
contributions no later than October 1, 2002.
• Until the issuance of further guidance, an applicable employer plan that permits
catch-up contributions will not fail to satisfy the requirements of Code § 414(v)(4)

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or § 1.414(v)-1(e) of the Proposed Income Tax Regulations solely because
another applicable employer plan maintained by the employer that is qualified
under Puerto Rico law does not provide for catch-up contributions.
II. BACKGROUND
A. Distributions from a Section 401(k) Plan
Code § 401(k)(2) as in effect prior to EGTRRA provides that elective
contributions under a qualified cash or deferred arrangement subject to § 401(k) may
not be distributed prior to the occurrence of certain events, including the employee’s
separation from service, the occurrence of an event described in § 401(k)(10), and in
the event of a hardship. The events listed in § 401(k)(10) are the termination of the plan
without establishment or maintenance of another defined contribution plan (other than
an employee stock ownership plan as defined in § 4975(e)(7)), the disposition by a
corporation of substantially all of the assets used by the corporation in a trade or
business of such corporation, and the disposition by a corporation of such corporation’s
interest in a subsidiary. Distributions may be made in connection with a sale of assets
or interest in a subsidiary only with respect to an employee who continues employment
with the corporation acquiring the assets or with the subsidiary, as applicable, and only
if the seller continues to maintain the plan.
Section 646 of EGTRRA amended Code § 401(k)(2)(B)(i)(I) by replacing
“separation from service” with “severance from employment.” In addition, § 646 of
EGTRRA amended Code § 401(k)(10) by deleting disposition by a corporation of
substantially all of the assets of a trade or business and disposition of a corporation’s
interest in a subsidiary, leaving termination of a plan as the only distributable event
described in § 401(k)(10). The amendments made by § 646 apply to distributions made
after December 31, 2001.
Under Regulations § 1.401(k)-1(d)(2)(iv), a distribution is treated as made on
account of hardship if it is made on account of an immediate and heavy financial need
and is necessary to satisfy the financial need. Section 1.401(k)-1(d)(2)(iv)(B) provides
that a distribution is deemed necessary to satisfy an immediate and heavy financial
need if certain requirements are met. One such requirement is that, after receipt of the
hardship distribution, a participant is prohibited from making elective contributions and
employee contributions to the plan and all other plans maintained by the employer for a
period of at least 12 months (the "elective contribution prohibition period"). Another
requirement is that the plan, and all other plans maintained by the employer, limit the
employee’s elective contributions for the next taxable year to the applicable limit under
Code § 402(g) for that year minus the employee’s elective contributions for the year of
the hardship distribution (the "post-hardship contribution limit").
Section 636(a) of EGTRRA directs the Secretary of the Treasury to revise the
regulations relating to distributions under Code § 401(k)(2)(B)(i)(IV) to provide that the
period during which an employee is prohibited from making elective and employee
contributions following a hardship distribution is 6 months, instead of 12 months, as
required under Regulations § 1.401(k)-1(d)(2)(iv)(B)(4). Section 636(a) is effective for

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years beginning after December 31, 2001. Notice 2001-56, 2001-38 I.R.B. 277,
provides guidance on § 636(a) of EGTRRA.
Code §§ 401(k)(12) and 401(m)(11) 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. Section V.B.1.c.iv of 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 contributions is suspended for 12 months
following a hardship distribution. Section VI.B.3 of Notice 98-52 provides that a plan will
not fail to satisfy the ACP matching contribution safe harbor merely because an eligible
employee’s ability to make employee contributions is suspended for 12 months
following a hardship distribution. Notice 2001-56 provides that, in order to continue to
rely on the matching contribution safe harbors, a plan must reduce the period during
which elective contributions and employee contributions are suspended following a
hardship distribution from 12 months to 6 months for calendar years beginning after
December 31, 2001.
B. Universal Availability of Catch-up Contributions under § 414(v)
Section 631 of EGTRRA added § 414(v) to the Code. Under § 414(v), an
individual age 50 or over is permitted to make catch-up contributions (up to a dollar limit
provided in § 414(v)(2)) under an applicable employer plan if certain requirements
provided in § 414(v) are satisfied. Section 414(v) also provides that a plan generally will
not violate any provision of the Code by permitting these catch-up contributions to be
made. Proposed regulations under § 414(v) were published in the Federal Register on
October 23, 2001 (66 FR 53555). Section 414(v) is effective for contributions in taxable
years beginning after December 31, 2001. The regulations are proposed to apply as of
this effective date.
Section 414(v)(4)(A) provides that an applicable employer plan shall be treated
as failing to meet the nondiscrimination requirements under § 401(a)(4) with respect to
benefits, rights, and features unless the plan allows all eligible participants to make the
same election with respect to catch-up contributions. Section 414(v)(4)(B) provides
that, for this purpose, all plans maintained by employers who are treated as a single
employer under subsection (b), (c), (m), or (o) of § 414 shall be treated as one plan.
Proposed Regulations § 1.414(v)-1(e) provides that an applicable employer plan
that offers catch-up contributions will not satisfy the requirements of Code § 401(a)(4)
unless all catch-up eligible participants who participate under any applicable employer
plan maintained by the employer are provided with the effective opportunity to make the
same dollar amount of catch-up contributions. Proposed Regulations § 1.414(v)-1(a)(4)
provides that a catch-up eligible participant is an employee who is eligible to make
elective deferrals during the plan year under an applicable employer plan (without
regard to Code § 414(v) or the proposed regulations) and is age 50 or over (or is treated
as age 50 as of January 1 of a year in accordance with Proposed Regulations
§ 1.414(v)-1(a)(4)(ii)). An applicable employer plan is a section 401(k) plan, a SIMPLE

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IRA plan, a simplified employee pension, a plan or contract that satisfies the
requirements of Code § 403(b), or a § 457 eligible governmental plan. The term
"employer" under the proposed regulations has the same meaning as this term under
Regulations § 1.410(b)-9. Under § 1.410(b)-9, the definition of employer includes the
employer maintaining the plan and those employers required to be aggregated with the
employer under Code § 414(b), (c), (m), or (o).
C. Remedial Amendment Period for EGTRRA
Notice 2001-42, 2001-30 I.R.B. 7, provides a remedial amendment period under
Code § 401(b) ending not prior to the last day of the first plan year beginning on or after
January 1, 2005, in which any needed retroactive remedial amendment with regard to
EGTRRA may be adopted. The availability of this remedial amendment period is
conditioned on the adoption of a good faith EGTRRA plan amendment no later than the
later of: (i) the end of the plan year in which the EGTRRA change in the qualification
requirement is required to be, or is optionally, put into effect under the plan; or (ii) the
end of the GUST remedial amendment period for the plan. Notice 2001-57, 2001-38
I.R.B. 279, provides sample good faith amendments with respect to several provisions
of EGTRRA, including §§ 631, 636(a), and 646.
III. DISTRIBUTIONS ON SEVERANCE FROM EMPLOYMENT
Under Code § 401(k)(2)(B)(i)(I), as amended by § 646 of EGTRRA, amounts
attributable to elective contributions may be distributed upon the employee’s severance
from employment with the employer maintaining the plan. For this purpose, the
employer includes all corporations and other entities treated as the same employer
under Code § 414(b), (c), (m), or (o). An employee does not have a severance from
employment if, in connection with a change of employment, the employee’s new
employer maintains the section 401(k) plan with respect to the employee (for example,
by assuming sponsorship of the plan or by accepting a transfer of plan assets and
liabilities (within the meaning of Code § 414(l)) with respect to the employee). Thus, for
example, if all employees of a controlled group of corporations (within the meaning of
§ 414(b)) are covered by a section 401(k) plan and a transaction occurs such that one
subsidiary corporation in the group is no longer aggregated with other members in the
group under § 414(b), (c), (m), or (o), and in connection with the transaction no assets
are transferred from the section 401(k) plan to a plan maintained by the former
subsidiary corporation, then, participants in the section 401(k) plan who continue
employment with the subsidiary corporation will have a severance from employment
with the employer maintaining the section 401(k) plan and may receive a distribution of
amounts attributable to elective contributions from that plan. However, if the subsidiary
corporation maintained a section 401(k) plan for its employees before the transaction
and continues to maintain the section 401(k) plan following the transaction, the
employees who continue employment with the subsidiary do not have a severance from
employment with the employer maintaining the plan.
The amendments to Code §§ 401(k)(2) and 401(k)(10) made by § 646 of
EGTRRA are effective for distributions made after December 31, 2001. A plan sponsor
of a section 401(k) plan that intends to permit distributions following an employee’s

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severance from employment must amend the plan to substitute severance from
employment for separation from service. A plan may provide for distributions on
severance from employment under Code § 401(k)(2)(B)(i)(I), as amended, on or after
January 1, 2002, regardless of whether the severance from employment occurred
before, on, or after January 1, 2002, and regardless of whether the distribution would
satisfy the requirements of pre-EGTRRA § 401(k)(2)(B) and the regulations thereunder
(including the 2-year rule in Regulations § 1.401(k)-1(d)(4)(iii)). Alternatively, the plan
could provide for distributions on or after January 1, 2002, to participants who have a
severance from employment on or after January 1, 2002 (or on or after another date
specified in the plan). For the rules regarding the timing of the adoption of such an
amendment, see Notices 2001-42 and 2001-57.
A section 401(k) plan will not fail to comply with Code § 401(k)(2)(B), as
amended by § 646 of EGTRRA, merely because it does not permit distributions in all
situations in which a participant has a severance from employment. Thus, for example,
a plan could limit distributions to situations in which a participant has a separation from
service or following a disposition of assets or disposition of a subsidiary under
circumstances under which a distribution is permitted under Code § 401(k)(2)(B)(i)(II)
and § 401(k)(10)(A)(ii) and (iii) as in effect prior to the EGTRRA amendments (see Rev.
Rul. 2000-27, 2000-1 C.B. 1016). Accordingly, a section 401(k) plan need not be
amended to provide for distributions upon severance from employment. However, if the
plan is not amended to provide for distributions following a severance from employment,
elective contributions can be distributed only to the extent permitted by the plan.
IV. DISTRIBUTIONS ON HARDSHIP
In response to the direction in § 636(a) of EGTRRA, the safe harbor provisions of
Regulations § 1.401(k)-1(d)(2)(iv)(B) will be revised. The requirement in § 1.401(k)-
1(d)(2)(iv)(B)(4) will be revised to reduce the elective contribution prohibition period from
a period of at least 12 months to a period of at least 6 months. In addition, the post-
hardship contribution limit in § 1.401(k)-1(d)(2)(iv)(B)(3) will be eliminated. Until the
issuance of further guidance, taxpayers can rely on the rules in this section IV.
This revised safe harbor will be effective for calendar years beginning after
December 31, 2001. Accordingly, the requirement that a participant’s elective
contributions under a plan (and all other plans maintained by the employer) be limited to
the post-hardship contribution limit is permitted to be eliminated effective for calendar
years beginning after December 31, 2001, for participants who received hardship
distributions during 2001. A section 401(k) plan will not fail to comply with the hardship
distribution safe harbor provisions under Regulations § 1.401(k)-1(d)(2)(iv)(B) solely
because it retains its existing post-hardship contribution limit. However, in order to
continue to rely on the matching contribution safe harbor under Code § 401(k)(12) or
§ 401(m)(11), a plan must eliminate the post-hardship contribution limit, effective for
calendar years beginning after December 31, 2001, for participants who receive a
hardship distribution after December 31, 2000.
Amendments related to the changes in the safe harbor for hardship distributions
addressed in this notice are integral to a qualification requirement that has been

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changed by EGTRRA. For purposes of determining whether a plan provision is a
disqualifying provision under Notice 2001-42, a plan sponsor will not fail to have
adopted a timely good faith amendment with respect to the hardship distribution safe
harbor even though the amendment does not specifically eliminate the post-hardship
contribution limit. However, if the plan sponsor does not adopt a good faith amendment
changing the elective contribution prohibition period (or adopts such a change effective
for a year different from the year in which the post-hardship contribution limit is
eliminated under the plan), the plan sponsor must adopt a timely good faith amendment
eliminating the post-hardship contribution limit in order for the provision to be a
disqualifying provision for purposes of the remedial amendment period under Notice
2001-42.
For example, a plan (other than a plan that relies on the matching contribution
safe harbor under Code § 401(k)(12) or § 401(m)(11)) will not fail to comply with the
revised safe harbor if it continues to prohibit elective and employee contributions for 12
months following a hardship distribution and, therefore, there is no requirement that a
good faith amendment be adopted changing this period from 12 months to 6 months.
However, in such case, a timely good faith amendment eliminating the post-hardship
contribution limit is required for there to be a remedial amendment period with respect to
the elimination of the limit.
V. CATCH-UP CONTRIBUTIONS UNDER § 414(v)
Under Code § 414(v)(4), a plan will not satisfy § 401(a)(4) unless all the catch-up
eligible participants in any applicable employer plan maintained by the employer are
provided with the effective opportunity to make the same dollar amount of catch-up
contributions. Under the proposed regulations, an applicable employer plan would fail
to comply with this provision unless all other applicable employer plans maintained by
the same employer begin offering catch-up contributions as of the same effective date.
Otherwise, there will be a period during which catch-up contributions are offered to
some catch-up eligible participants but not to all. In contrast, a plan does not fail to
satisfy the requirements of § 414(v)(4) and the proposed regulations solely because
catch-up contributions are administered differently under different plans, provided that
the administrative method under each plan satisfies the basic requirement that it provide
the catch-up eligible participants in that plan with the effective opportunity to make the
same dollar amount of catch-up contributions as the catch-up eligible participants in
other plans maintained by the same employer.
The Service has received comments since the issuance of the proposed
regulations indicating that it will be difficult for employers to comply with the universal
availability requirement as of the beginning of 2002. These comments point out that this
is a new section of the Code, so that plan administrative systems must be modified to
allow for catch-up contributions. In addition, employers have expressed concern that
there may be some plans that have difficulty with these new provisions, and that, as a
result, plans maintained by the same employer may adopt and implement catch-up
contributions as of different dates.
The Service has also received comments regarding compliance with Code

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§ 414(v)(4) by an employer that maintains a plan that is qualified under Puerto Rico tax
law as well as under the Code (pursuant to § 1022(i)(2) of ERISA). Puerto Rico law
does not provide for catch-up contributions. If an employer maintains a plan qualified
both under Puerto Rico law and under the Code, the employer could be effectively
prohibited from offering catch-up contributions to catch-up eligible participants in other
applicable employer plans maintained by the employer.
In response to these concerns and to ease the administrative burden of the initial
implementation of Code § 414(v), this notice provides that a plan will not be treated as
failing to satisfy the requirements of § 414(v)(4) for 2002 solely because different plans
maintained by the same employer (as defined in Regulations § 1.410(b)-9) adopt catch-
up contributions beginning on different dates during 2002, provided that all such plans
begin offering catch-up contributions no later than October 1, 2002.
In addition, until the issuance of further guidance, an applicable employer plan
(within the meaning of Code § 414(v)(6)(A)) that permits catch-up contributions will not
fail to satisfy the requirements of Code § 414(v)(4) or Proposed Regulations § 1.414(v)-
1(e) solely because another applicable employer plan maintained by the employer that
is qualified under Puerto Rico law does not provide for catch-up contributions.
DRAFTING INFORMATION
The principal author of this notice is Roger Kuehnle of the Employee Plans, Tax
Exempt and Government Entities Division. For further information regarding this notice,
please contact Employee Plans’ taxpayer assistance telephone service at 1-877-829-
5500 (a toll-free number), between the hours of 8:00 a.m. and 9:30 p.m. Eastern Time,
Monday through Friday. Mr. Kuehnle can be reached at 1-202-283-9888 (not a toll-free
number).