rr-98-30.pdf

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Part I
Section 401. --Pension, Profit-Sharing, Stock Bonus Plans, etc.
26 CFR 1.401(k)-1: Certain Cash or Deferred Arrangements.
Rev. Rul. 98-30
ISSUE
Will employer contributions to a profit-sharing plan fail to be considered elective
contributions, within the meaning of § 1.401(k)-1(g)(3) of the Income Tax Regulations,
made under a qualified cash or deferred arrangement, within the meaning of § 401(k) of
the Internal Revenue Code, merely because they are made pursuant to an
arrangement under which, in any case in which an employee does not affirmatively
elect to receive cash, the employee's compensation is reduced by a fixed percentage
and that amount is contributed on the employee's behalf to the plan?
FACTS
Employer X maintains Plan A, a profit-sharing plan intended to satisfy the
requirements of § 401(a), including §§ 401(k) and 401(m). Under Plan A, any
employee of Employer X, including an employee with less than one year of service,
may elect to have Employer X make contributions on the employee's behalf to Plan A in
lieu of receiving that amount as cash compensation that would otherwise be payable to
the employee. The employee may designate the amount of these compensation
reduction contributions as a percentage of the employee's compensation, subject to
certain limitations set forth in the plan.
Under Plan A, a newly hired employee is immediately eligible to participate in
Plan A. If the employee does not affirmatively elect to receive cash or have a specified
amount contributed to Plan A, his or her compensation is automatically reduced by 3
percent and this amount is contributed to Plan A. An election not to make
compensation reduction contributions or to contribute a different percentage of
compensation can be made at any time. The election is effective for the first pay period
and subsequent pay periods (until superseded by a subsequent election) if filed when
the employee is hired or if filed within a reasonable period thereafter ending before the
compensation for the first pay period is currently available. Thus, if an employee files
an election to receive cash in lieu of compensation reduction contributions and the
election is filed when the employee is hired or within a reasonable period thereafter
ending before the compensation is currently available (and if the employee does not
later elect to have compensation reduction contributions made), then no compensation

The Department of Labor has advised Treasury and the Service that, under Title I of the
1
Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries of a plan must ensure
that the plan is administered prudently and solely in the interest of plan participants and
beneficiaries. While ERISA § 404(c) may serve to relieve certain fiduciaries from liability when
participants or beneficiaries exercise control over the assets in their individual accounts, the
Department of Labor has taken the position that a participant or beneficiary will not be considered
to have exercised control when the participant or beneficiary is merely apprised of investments
that will be made on his or her behalf in the absence of instructions to the contrary. See 29 CFR §
2550.404c-1 and 57 FR 46924.
reduction contributions for the first pay period are made on the employee’s behalf to
Plan A. Elections filed at a later date are effective for payroll periods beginning in the
month next following the date the election is filed.
At the time an employee is hired, the employee receives a notice that explains
the automatic compensation reduction election and the employee’s right to elect to
have no such compensation reduction contributions made to the plan or to alter the
amount of those contributions, including the procedure for exercising that right and the
timing for implementation of any such election. The employee is subsequently notified
annually of his or her compensation reduction percentage and the employee’s right to
change the percentage.
Plan A provides that compensation reduction contributions are immediately
nonforfeitable and, if the employee has not attained age 59 1/2, cannot be distributed
prior to the employee’s retirement, death, or separation from service except in the case
of hardship (as defined in the plan). Plan A also provides that, for each employee who
has at least 1 year of service, Employer X will make matching contributions to Plan A
on account of the employee’s compensation reduction contributions up to a specified
percentage of the employee’s compensation. Plan A does not permit after-tax
employee contributions.
Plan A provides that both matching contributions and compensation reduction
contributions will be invested in accordance with the participant’s election among a
broad range of investment funds held by the trustee or, if no investment election is
made by the participant, in the trust’s balanced fund which includes both diversified
equity and fixed income investments.
1
LAW AND ANALYSIS
Section 401(k) provides that a profit-sharing or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan can meet the requirements of
§ 401(a) even if it includes a qualified cash or deferred arrangement. Section 401(k)
also sets forth the requirements that a cash or deferred arrangement must satisfy in
order to be a qualified cash or deferred arrangement.

Section 1.401(k)-1(a)(2)(i) defines a cash or deferred arrangement as an
arrangement under which an eligible employee may make a cash or deferred election
with respect to contributions to, or accruals or other benefits under, a plan that is
intended to satisfy the requirements of § 401(a). Section 1.401(k)-1(a)(2)(ii) provides
that a cash or deferred arrangement does not include an arrangement under which
amounts contributed under a plan at an employee's election are designated or treated
at the time of contribution as after-tax employee contributions.
Section 1.401(k)-1(a)(3)(i) defines a cash or deferred election as any election (or
modification of an earlier election) by an employee to have the employer either provide
an amount to the employee in the form of cash (or some other taxable benefit) that is
not currently available or contribute an amount to a trust (or provide an accrual or other
benefit) under a plan deferring the receipt of compensation. Section
1.401(k)-1(a)(3)(iv) provides that a cash or deferred election does not include a one-
time irrevocable election, made at the time an employee commences employment with
the employer or upon the employee's first becoming eligible under any plan of the
employer, to have contributions made by the employer on the employee's behalf to the
plan (or to any other plan of the employer) equal to a specified amount or percentage of
the employee's compensation.
Section 1.401(k)-1(e)(2) provides generally that a qualified cash or deferred
arrangement must provide that the amount that each eligible employee may defer as an
elective contribution is available to the employee in cash.
Section 1.401(k)-1(g)(3) defines elective contributions as employer contributions
made to a plan that were subject to a cash or deferred election under a cash or
deferred arrangement. Such contributions are elective contributions without regard to
whether the cash or deferred arrangement is a qualified cash or deferred arrangement.
The definition of a cash or deferred election in § 1.401(k)-1(a)(3)(i) requires that
the employee have an election between the employer paying cash (or some other
taxable benefit) to the employee or making a contribution to a trust on behalf of the
employee. The regulation does not require that the employee receive an amount in
cash in any case in which the employee does not make an affirmative election to have
that amount contributed to the trust. Thus, a cash or deferred election will not fail to be
made under a qualified cash or deferred arrangement merely because, when an
employee fails to make an affirmative election with respect to an amount of
compensation, that amount is contributed on the employee's behalf to a trust, provided
that the employee had an effective opportunity to elect to receive that amount in cash.
The employee has an effective opportunity to elect to receive an amount in cash as
required under § 1.401(k)-1(a)(3)(i) if the employee receives notice of the availability of
the election and the employee has a reasonable period to make the election before the
date on which the cash is currently available.
If Plan A were to permit after-tax employee contributions, then the amounts

contributed to the plan would have to be designated or treated, at the time of the
contribution, as pre-tax compensation reduction contributions or after-tax employee
contributions.
Compensation reduction contributions made by Employer X to Plan A (including
those made if the employee has not filed an election to the contrary) are amounts
contributed pursuant to a procedure under which the employee receives a notice
explaining his or her rights to have no compensation reduction contribution and, after
receiving the notice, the employee has a reasonable period before the cash is currently
available in which to elect to receive the cash in lieu of having an employer contribution
made to the plan in that amount. Thus, an eligible employee has an effective
opportunity to elect to receive cash or have a contribution made to the plan on the
employee’s behalf. In addition, compensation reduction contributions made under the
plan are not contributions made pursuant to a one-time irrevocable election because
the employee can change the election in the future. Consequently, the compensation
reduction contributions under Plan A are made pursuant to a cash or deferred election
and satisfy the requirement in § 1.401(k)-1(a)(3)(i) that the amount that each eligible
employee may defer as an elective contribution be available to the employee in cash.
The result would be the same if the plan required a period of service (permitted under
§ 401(k)(2)(D)) before an employee became eligible for elective contributions.
HOLDING
Where, as in this case, an eligible employee has an effective opportunity to elect
to receive cash or have that amount contributed by the employer to a profit-sharing
plan, those employer contributions made on the employee's behalf to the plan in lieu of
receipt of cash compensation will not fail to be considered elective contributions within
the meaning of § 1.401(k)-1(g)(3) made under a qualified cash or deferred arrangement
within the meaning of § 401(k) merely because they are made pursuant to an
arrangement under which, in any case in which an employee does not affirmatively
elect to receive cash, the employee's compensation is reduced by a fixed percentage
and that amount is contributed on the employee's behalf to the plan.
PAPERWORK REDUCTION ACT
The collection of information contained in this revenue ruling has been reviewed
and approved by the Office of Management and Budget (OMB) in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1605.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
The collection of information in this revenue ruling is in the sixth paragraph in
the section headed "LAW AND ANALYSIS." This information is required in order for

certain employee elections to meet the requirements of § 401(k). The collection of
information is required to obtain a benefit. The likely respondents are businesses or
other for-profit institutions, and not-for-profit institutions.
The estimated total annual reporting burden is 1,000 hours. The estimated
annual burden per respondent is 1 hour. The estimated number of respondents is
1,000.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any Internal Revenue
law. Generally, tax returns and tax return information are confidential, as required by
26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue ruling is Roger Kuehnle of the Employee
Plans Division. For further information regarding this revenue ruling, call the Employee
Plans Division's taxpayer assistance telephone service at (202) 622-6074/6075 (not
toll-free numbers) between 1:30 and 3:30 p.m. Eastern Time, Monday through
Thursday.