Summer 2009
IRS Issues Final 401(k) Regulations on Automatic Contribution Arrangements
On Feb. 24, 2009, the IRS issued final regulations for automatic enrollment arrangements. The regulations also addressed some of the concerns regarding the proposed rules, such as the treatment of rehired employees and the availability of mid-year Eligible Automatic Contribution Arrangements (EACAs).
These final regulations apply to qualified 401(k) plans, 403(b), 457(b) governmental, 408(k)(6) Simplified Employee Pension and 408(p) SIMPLE plans that contain either an EACA or Qualified Automatic Contribution Arrangement (QACA) automatic contribution arrangement. An automatic contribution arrangement that is not a QACA or EACA is not affected by these final regulations.
Changes Affecting EACAs
An EACA arrangement may allow automatically enrolled participants to withdraw automatic contributions within certain time frames. It also allows corrective nondiscrimination testing (ADP or ACP) refunds six months after the end of the plan year ― instead of the customary two-and-a-half months ― without incurring the 10 percent employer excise tax.
The final regulations include these significant changes:
- An EACA must be adopted prior to the beginning of the plan year, thus prohibiting mid-year implementation.
- Voluntary withdrawal of automatic participant contributions may occur between 30 and 90 days after the first deferral.
- A plan has more flexibility as to which employees must be subject to the EACA arrangement (such as new hires only), but exclusions may result in losing the six-month extension for excise tax-free refunds.
- Disaggregated populations may be treated differently for EACA purposes.
- Notices to eligible employees in plans that permit immediate eligibility must be delivered prior to initial deferral-related pay date.
Effective Date: The final regulations for EACAs are effective for plan years beginning in 2010 or later. EACA plans are required to operate in good faith compliance prior to that date.
Changes Affecting QACAs
A QACA automatically satisfies the ADP and ACP non-discrimination tests due to required, specified levels of automatic default deferrals and safe harbor employer contributions for all eligible employees.
Some of the more significant final regulation QACA changes are:
- A QACA must be adopted prior to the beginning of the plan year (same as EACAs)
- The regulations clarify what level of default automatic contribution may be applied to rehired employees (a full plan year without any automatic contributions may restart the deferral schedule)
- Notices to eligible employees in plans that permit immediate eligibility must be delivered prior to initial deferral-related pay date
- A safe harbor definition of compensation under IRC Section 414(s) must be used by plans in determining levels of employee default and employer safe harbor contributions
- Only employees who have an affirmative election in effect can be excluded from QACA default automatic contributions (employees who previously were deemed to elect “zero” upon failure to return an election form are not considered as having filed an affirmative election)
Effective Date: The final regulations for QACAs are effective retroactively for plan years beginning on or after Jan. 1, 2008. The requirement to use a safe harbor definition of compensation, however, is delayed until plan years beginning on or after Jan. 1, 2010.
Required Plan Amendments
In general, discretionary amendments must be adopted on or before the end of the plan year in which the amendment is effective. However, both EACA and QACA were first introduced as part of the Pension Protection Act of 2006 (PPA), effective for plan years beginning on or after Jan. 1, 2008, and were allowed additional time to adopt these provisions.
Amendments for PPA provisions, both required and discretionary, must be adopted on or before the last day of the 2009 plan year (last day of 2011 plan years for governmental plans) and made retroactively effective to the first day of the plan year in which they were added to the plan. [PPA Section 1107(b)(1)(B)]
For calendar-year plans, the deadline for adopting amendments implementing EACAs or QACAs is generally Dec. 31, 2009. For a plan year starting July 1, the deadline is generally June 30, 2010.
The format of the PPA Amendment, which will encompass these changes, is currently under review. It will require an employer signature and will be provided during 2009.
Other Automatic Contribution Arrangement Regulations
These changes come on the tail of other legislation and regulations that have been released regarding automatic contribution arrangements. Most notable is the Pension Protection Act of 2006 (PPA), which promoted automatic enrollment arrangements to encourage participation in salary deferral plans. In Nov. 2007, the IRS issued proposed regulations with good-faith guidelines for plan years beginning after 2007. In Dec. 2008, Congress made technical corrections to PPA in the Worker, Retiree, and Employer Recovery Act of 2008.
