New 401(k) Rules Allow ESOPs and 401(k) plans to Be Treated as Single Plan for Anti-Discrimination Testing in Spin-offs and Mergers

Effective December 29, 2004, final regulations under Section 401(k) (T.D. 9169) allow the ESOP and non-ESOP portions of a "Section 414(l) plan" (a cash or deferred arrangement defined contribution plan that results from a merger or spin-off) to be aggregated for purposes of assessing whether the plans meet the average deferral percentage (ADP) and average compensation percentage (ACP) tests applicable to 401(k) plans. In other words, if an ESOP is, for instance, combined with a 401(k) plan, the contributions made to the ESOP by the employer and, if applicable, employees are added to the 401(k) contributions and deferrals to determine if these anti-discrimination rules for contributions and deferrals are satisfied.