Retirement Plan, Automatic Contribution Regulations – Issued
Final regulations have been issued relating to qualified automatic contribution arrangements and eligible contribution arrangements. These concepts were established by the Pension Protection Act, and modified in the “Worker, Retiree, and Employer Recovery Act of 2008.” (See Benefit Beat, October, 2006 – “Default Investments: Great Expectations”).
Generally, the rules relating to qualified automatic contribution arrangements (“QACAs”) apply to plan years beginning on or after January 1, 2008; the rules relating to eligible contribution arrangements (“ECAs”) generally apply to plan years beginning on or after January 1, 2010. However, if a plan adopts such an arrangement, good faith compliance with the proposed or final regulations is required.
In a nutshell, these arrangements allow default participation in certain types of retirement and saving plans, such as 401(k) and 403(b) plans. For a QACA, the minimum initial contribution is 3%, which then increases by 1% each year, up to at least 6%. The regulations clarify that the initial period of participation is defined as the period for which the first contribution is made through the default process if a participant has not made an affirmative election to participate in the plan.
One of the outstanding questions has been: “What happens if an individual’s contribution ceases due to termination of employment, and the individual is then rehired?” The regulations provide that, generally, the incremental increase in contribution percentage is not affected by a break in participation. However, the regulations state that if there has been no contribution made for more than a year, the contribution schedule can start over with a new initial participation period.
Another outstanding question relates to whether a QACA or ECA can be commenced mid-plan year. The final regulations provide that QACA and ECA provisions can not be adopted by a plan, mid-year. However, the regulations do allow the contribution incremental increase to be tied to a salary increase.
Notice Of Automatic Enrollment Features
An explanation of the automatic contribution provision must be provided on or before the initial date of eligibility, or as soon as practicable thereafter when it is not possible to provide advance notice. In this situation, deferrals must be allowed from compensation beginning with initial eligibility.
For an ECA, the employer unilaterally enrolls the employee without risk of violating consent requirements for payroll withholding and with some protection from fiduciary requirements. An individual must be given the opportunity to revoke the automatic contribution; the individual has 90 days to request the withdrawal. The regulations clarify that the 90 days is measured from the date the compensation would have been includable in income were it not for the automatic contribution. The plan withdrawal would occur in accordance with plan provisions though penalties would not apply.
While it is uncertain how many employers will implement automatic contribution arrangements at this time, these regulations put the framework in place for employers to adopt this plan design when the time is appropriate.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
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