October 8, 2009

New Retirement and Savings Initiatives

Amid the flurry of health-related activity ranging from H1N1 preparedness, to health system reform, the Obama Administration has found time to begin placing its mark on retirement savings, as well.  Within a span of just of couple of days, the IRS issued several Retirement and Savings Initiatives; and, the DOL issued a Field Assistance Bulletin, all in an effort to facilitate individual savings.  Following is a brief summary of some of these pronouncements.  It is important to note that these are not new laws; rather, interpretations of existing law.

Contributing Unused Leave to 401(k) Plans

It is not surprising that many Americans do not use all available paid time off (PTO), including paid sick leave or paid vacation.  One option to utilize unused PTO is to convert it as a contribution to a 401(k) plan. 

The IRS and Treasury issued Revenue Rulings 2009-31 and 2009-32 that provide the roadmap for just such arrangements.  

  • Revenue Ruling 2009-31 addresses two scenarios, both relating to unused PTO at the end of the year.  
    • In the first scenario, an employer can design its PTO plan to provide that there is no cash out of available PTO, but unused PTO is contributed to a 401(k) plan.  According to this Ruling, this type of plan design is permissible, as long as the plan can comply with the IRC Section 415 limits, and the general nondiscrimination rules found in IRC Section 401(a)(4).  
    • The ruling goes on to address a plan design in which an employee can elect to take the cash equivalent of the PTO, or contribute it to a 401(k) plan.  Again, this Ruling condones this type of plan design, as long as the IRC Section 402(g) elective deferral limits, as well as the IRC Section 415 limits, and ADP tests, can be satisfied.
  • Revenue Ruling 2009-32 addresses PTO at termination of employment.  Again, this Ruling supports a nonelective contribution plan design, as well as a cash or deferred election type plan design, as long as all of the plan rules can be satisfied.  The Ruling goes on to provide that the contribution can be made in the year following the year of employment termination, and would count toward the deferral limits in the year of contribution.  This might be very useful in facilitating passage of the ADP test. 

One issue that needs to be considered in any of the above plan designs relates to various state laws that may require pay-out of unused PTO.  

Revised Rollover Distribution Notices

Traditional IRAs and employer-sponsored retirement plans, including 401(k) plans, 403(b) plans, and governmental 457 plans, are required to provide written explanation to plan participants describing the rollover rules, as well as tax and income consequences of plan distributions.  The IRS issued two new rollover distribution notices, by way of Notice 2009-68.  These rollover notices are intended to bring the existing rollover model notices up to speed with current law. 

Two notices are offered: one is specific to designated Roth accounts, and the second to other kinds of distributions.  If a distribution is comprised of a designated Roth account, and a non-Roth account, a combination of the two notices should be provided.  

In this pronouncement, the IRS makes it clear that any components of a rollover notice that are inapplicable to a particular plan design can be removed.  The intent of these notices is to make it easier for participants to understand when, and how, account distributions can be rolled over to other tax-favored accounts.

Effective date.  Plans can begin to use the new rollover notices immediately.  Existing rollover notices can be used until January 1, 2010, as long as the notices are modified appropriately to reflect current law. 

Automatic Enrollment and Default Contribution Limits 

IRS Notice 2009-65 provides sample amendments that can be used to incorporate an automatic contribution feature into a 401(k) plan.  One is a basic automatic contribution amendment; and the other is an eligible contribution arrangement feature.

The eligible contribution amendment allows a participant to opt-out of the automatic contribution arrangement, and withdraw money already contributed, as long as the opt-out occurs within 90 days of the first automatic contribution.  This Notice makes it clear that the amendment(s) can be adopted at any time prior to the end of the plan year to which it applies.  This provision notwithstanding, safe harbor plans generally must be amended before the beginning of the plan year.  However, no automatic contribution can begin until a reasonable period of time (deemed to be at least 30 days) after the participant has been given a notice, explaining the automatic contribution feature and the right to opt out.

Automatic Contribution Increases

Revenue Ruling 2009-30 addresses two situations in which automatic contributions can be automatically increased without running afoul of rules. 

  • The first situation addresses a simple automatic contribution arrangement.  It provides that the elective deferral rules will not be violated just because the automatic contribution is increased in part, in conjunction with a compensation increase.  
  • The other scenario specifically addresses “qualified automatic contribution arrangements” and “eligible automatic contribution arrangements”.  These arrangements have specific uniformity requirements, which would suggest that any default increase would have to occur prior to the beginning of the plan year.  This Ruling states that the automatic increase can occur in conjunction with a uniform compensation increase date, rather than at the beginning of the plan year, without violating the uniformity requirement. Pivotal to this requirement is that the first compensation adjustment must occur in the first year of participation; subsequent contribution adjustments must occur at that same point in the plan year.

Retirement Plan Navigator

A segment of the IRS website is devoted to providing information about various retirement plan options available to small employers. The Retirement Plan Navigator includes tools on how to choose and maintain a retirement plan, as well as how to correct for plan operational mistakes.

Use of Summary Prospective Requirements

In Field Assistance Bulletin (FAB) 2009-03, the DOL describes when a summary prospectus can be used to satisfy the prospectus disclosure requirement.  ERISA Section 404(c) requires fiduciaries of participant directed account plans to provide certain information to participants for use when evaluating and comparing plan investment options.  This FAB states that if a summary prospectus is used, it will satisfy the ERISA Section 404(c) disclosure obligation.  

A summary prospective must include:

  1. The mutual fund’s name;
  2. The share classes to which the summary prospectus relates;
  3. The ticker symbol for each such class;
  4. A required legend containing a Web site address;
  5. The approximate date of the summary prospectus’ first use; and
  6. The e-mail address and toll-free telephone number where investors may obtain the statutory prospectus and other information free of charge.

In addition, the summary prospectus must contain the key information required to appear at the beginning of the statutory prospectus under the new rules, including information regarding the investment objectives or goals of the fund, fee and expense information, principal investment strategies, the risks associated with an investment in the fund, fund performance, investment advisers and sub-advisers, portfolio managers, purchase and sale of fund shares, tax information and financial intermediary compensation.


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.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service

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