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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has issued final regulations on automatic contribution arrangements under 401(k) plans. The final regulations, which adopt provisions of the proposed regulations issued in November 2007 with certain modifications, reflect the Pension Protection Act of 2006 (PPA; P.L. 109-280) and the Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458). The regulations relating to qualified automatic contribution arrangements (QACAs) apply to plan years beginning on or after January 1, 2008. The regulations relating to eligible automatic contribution arrangements (EACAs) apply for plan years beginning on or after January 1, 2010. However, plans may comply with the requirement to operate in accordance with a good faith interpretation of Code Sec. 414(w) by adhering to the final rules.
Under an automatic contribution arrangement, in the absence of an affirmative election by an eligible employee, a default election applies under which the employee is treated as having made an election to have a specified contribution made on his or her behalf to the plan. The PPA authorized a design-based safe harbor for a 401(k) plan that provides for automatic contributions at a specified level of contributions and that meets certain contribution, notice, and other requirements. An arrangement that satisfies these requirements, which is referred to as a QACA, is treated as satisfying the actual deferral percentage and actual contribution percentage tests of the Code. The PPA further authorized EACAs to enable employers to unilaterally enroll employees in their 401(k) plans at a specified percentage of compensation and invest contributions in DOL-approved default investment funds without fear of fiduciary liability and without being subject to state garnishment law restrictions.
The final regulations clarify that, under Code Sec. 401(k)(13)(C)(iii), the minimum percentage for the initial period is based on when the employee first has contributions made pursuant to a default election under a QACA. Thus, if an employee makes an affirmative election before the default contribution would have begun, then the initial period does not begin for the employee. The minimum percentages are increased for plan years after the initial period. The regulations provide that the minimum percentages, in the case of a rehired employee, are determined without regard to whether an employee has continued to be eligible to make contributions under the plan. Thus, the minimum percentage is generally determined based on the number of years since the date the employee first had default contributions made under the QACA. However, the final regulations also provide that a plan is permitted to treat an employee who for an entire plan year did not have contributions made pursuant to a default election under the QACA as if the employee had not had such contributions for any prior plan year as well.
The final rules modify the proposed regulations to provide that the employees who must be subject to the automatic enrollment provisions under an EACA are only those employees who are specified in the plan as being covered employees under the EACA. Thus, automatic enrollment under an EACA need not apply to all employees eligible to make a deferral election under the applicable plan, but only to those employees who are covered by the EACA. Separate EACAs may be established for different groups under a plan (e.g., collectively bargained and non-collectively bargained employees). However, for purposes of the requirement that default elective contributions under an EACA be a uniform percentage of compensation, all automatic contribution arrangements within a plan that are intended to be EACAs must be aggregated. A plan subject to the minimum coverage requirements of Code Sec. 410(b) may provide for separate EACAs for different groups of employees or different employers in a multiple employer plan with a different percentage for each EACA. However, the disaggregation rules of IRS Reg. §1.401(k)-1(b)(4) apply.
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