Spring 2009
EACAs Get a Little Nip and Tuck
The Worker, Retiree and Employer Recovery Act of 2008 (Recovery Act of 2008), passed on December 23, 2008, contains technical corrections to the requirements for eligible automatic contribution arrangements (EACAs). Additionally, the IRS issued final regulations on February 24, 2009, relating to Automatic Contribution Arrangements.
What remains unchanged
EACAs were created by the Pension Protection Act of 2006 (PPA) to encourage participation in salary deferral plans. If an automatic contribution arrangement meets the requirements of an EACA, a plan sponsor may allow automatically enrolled plan participants to request withdrawals, called “permissible withdrawals,” within 90 days of the date of the participant’s first automatic contribution. Further, plan sponsors are allowed up to six months to correct ADP and ACP failures without penalty when the EACA covers all eligible employees.
An EACA is no longer required to comply with certain QDIA regulations
To qualify as an EACA, the PPA required contributions made in the absence of a participant investment election to be invested in a default investment fund that would satisfy the Department of Labor’s rules relating to Qualified Default Investment Alternatives (QDIAs).
Under the Recovery Act’s technical corrections, an EACA no longer needs to comply with the QDIA regulations for purposes of selecting a default fund.
Extended correction period for ADP and ACP failures
Previously, an employer was required to apply the automatic contribution provision to all eligible employees other than those who had made an affirmative election either to make or not to make contributions to the plan. Under the recent final regulations, only those employees who are identified in the plan as being covered employees under the EACA are subject to the EACA.
The plan cannot rely on the extended correction period, however, unless all eligible non-highly compensated employees (NHCEs) and highly compensated employees (HCEs) are subject to the EACA for the entire plan year. In cases where eligible NHCEs and HCEs are not subject to the EACA, plan sponsors must return excess amounts resulting from testing failure to HCEs within the two-and-a-half-month correction period to avoid the 10 percent excise tax.
Which types of plans can take advantage of these changes?
The following types of defined contribution retirement plans that provide for automatic enrollment provisions can take advantage of these changes:
- 401(k) plans
- 403(b) tax-sheltered annuities
- 457(b) governmental plans
How does this affect existing automatic enrollment plans?
If a plan has an automatic enrollment feature without a QDIA default fund that otherwise meets the requirements of an EACA, we believe it is now considered an EACA and is able to take advantage of the more favorable EACA provisions discussed above.
Because an EACA intended to take advantage of the extended six-month correction period must cover all participants who have never made an election to contribute as well as newly eligible participants, it may be necessary to expand the group of affected participants to qualify for the extended correction period. Also, permissible withdrawals are allowed only if the employer elects to allow them.
If a plan previously elected to comply with the PPA EACA requirements, then it is not necessary to take any action, although a plan’s default fund could be changed from a QDIA and the plan could still be considered to contain an EACA.
When will my plan be amended for this new provision?
Plans must be amended for PPA by the end of the plan year beginning on or after January 1, 2009.
How do I add an EACA?
If you have not already taken the necessary steps for an EACA but would now like to consider it, please contact your client service consultant or account manager at The Standard.
