New IRS rules encourage automatic 401(k) contributions
To encourage employee participation in retirement savings plans, the Pension Protection Act of 2006 (PPA), made it easier for plan sponsors to facilitate automatic enrollment arrangements in Code Sec. 401(k) plans, 403(b) tax sheltered annuity plans and some 457 governmental plans. The IRS has now made it even easier.
Automatic enrollment in 401(k) and similar retirement savings plans was one of the most highly publicized changes in the PPA. Recently, the IRS issued “reliance regulations” governing automatic enrollment in 401(k), 403(b) and some 457 plans. These regs also describe a special nondiscrimination safe harbor for qualified contribution arrangements (QACAs). Importantly, formal amendments to pre-existing Code Sec. 401(k) plans that add QACAs for 2008 and 2009 are not required to be made until the 2009 plan year, due to a special provision regarding PPA amendments that allows such amendments to be made in 2009.
The new regs are effective for plan years beginning on or after January 1, 2008, and may be relied upon pending the issuance of final rules that are expected sometime later in 2008.
Safe harbor for QACAs
For plan years beginning on or after January 1, 2008, the new IRS rules amend the current design safe harbor under Code Sections 401(k) and 401(m) to provide for an additional design-based safe harbor for qualified automatic contribution arrangements. They provide that plan arrangements that qualify as QACAs will be treated as having satisfied the actual deferral percentage and actual contribution percentage tests that would otherwise apply to employee elective deferrals and employer matching contributions. These plans will also generally be exempt from the top-heavy rules, which serve to prohibit owners and other key employees from disproportionately benefiting under a plan.
Employer matching contributions
Under the new IRS rules, employers with a QACA have the option to choose between providing either matching or nonelective contributions.
Safe harbor notice required
The new rules also set out clear notification rules that an employer must follow if it wants to benefit from automatic enrollment. Each eligible employee under a QACA must receive a safe harbor notice “within a reasonable period before each plan year” that explains the following:
- The employee’s right to elect not to have elective contributions made on their behalf or to elect to have contributions made in a different amount or percentage.
- How contributions made under a QACA will be invested absent any investment decision by the employee.
Permissible withdrawal rules
The new IRS rules also help out employers who realize that there are some employees who would rather not participate in a 401(k). They allow, but not require, an employer with an eligible automatic contribution arrangement (EACA) to adopt permissible withdrawal rules. The rule would permit a plan participant to withdraw certain default elective deferrals within 90 days of the first elective deferral made to the EACA without the distribution being subject to the normal 10-percent early withdrawal tax.
(NPRM REG-133300-07)
|
