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CCH® PENSION — 5/30/08

Benefits Groups Call For Flexibility In IRS Regs On Automatic 401(k) Contributions

From Spencer's Benefits Reports: In testimony presented at a May 19 hearing on the Internal Revenue Service’s proposed regulations governing automatic contribution arrangements under 401(k) and similar plans, the American Benefits Council and the Investment Company Institute (ICI) called for the IRS to provide greater flexibility in the rules. On Nov. 8, 2007, the IRS proposed regulations under IRC Secs. 401(k)(13), 401(m)(12), and 414(w) relating to automatic contribution arrangements.

The Pension Protection Act of 2006 (PPA) added Secs. 401(k)(13), 401(m)(12), and 414(w) to the Tax Code to facilitate automatic contribution arrangements in 401(k) plans, as well as in similar arrangements under IRC Sec. 403(b) tax-sheltered annuities and IRC Sec. 457(b) deferred compensation plans of state and local governments. 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. These PPA changes were effective for plan years beginning on or after Jan. 1, 2008.

Jan M. Jacobson, senior counsel of retirement policy for the American Benefits Council, suggested improvements in several areas of the IRS’s regulations, including eligible automatic contribution arrangements (EACAs) and permissive withdrawals. Under the IRS’s regulations, EACAs do not receive the benefit of the safe harbor from nondiscrimination testing offered to qualified automatic contribution arrangements (QACAs). According to Ms. Jacobson, “The Council recommends that the final regulations greatly simplify the requirements for EACAs. The proposed regulations impose a level of administration and regulation on EACAs that seems more consistent with a nondiscrimination testing safe harbor, rather than a plan design that is merely entitled to a modest additional in-service distribution right and an extended period to determine excess contributions.

“First, the Council requests clarification that midyear EACAs are permitted,” Ms. Jacobson continued. “The proposed regulations seem to imply that a full plan year is required to implement an EACA. However, the statutory language does not specify that automatic contribution arrangements must be in place for a full year in order for the plan to offer permissive withdrawals or for the six-month time period for distributions of excess contributions to apply. Many plan sponsors have been discouraged from implementing automatic contribution arrangements because they were unable to meet notice requirements prior to a first of the plan year implementation.

“Second, the Council believes that additional flexibility should be provided to EACAs, as opposed to QACAs, so that an EACA can be offered only to new hires. The proposed regulations indicate that all participants under the plan that have not made a prior affirmative election need to be automatically enrolled under an EACA. At the very least, it should be permissible to exclude or selectively include collectively bargained employees in an EACA and employees covered under different portions of a multiple employer plan. And third, the Council would like to see clarification about any special requirements that apply if an employer decides to discontinue an EACA.”

Permissive Withdrawals

With respect to permissive withdrawals, Ms. Jacobson asked for several clarifications. “First, it is important that the final regulations clarify that plan sponsors can limit the 90-day permissive withdrawals provision to first-time enrollees. This would alleviate concerns of some plan sponsors that have previously implemented automatic contribution arrangements. Second, the proposed regulations state that the election to withdraw an EACA contribution must be made within a prescribed 90-day election period that begins on the date of the first EACA contribution. However, the proposed regulation does not explicitly state when the distribution actually must be made. The Council believes that the final regulations should provide significant flexibility in the timing of distributions.”

Ms. Jacobson went on to note, “The Council is also concerned that, under the proposed regulations, the 90-day clock begins running from the date an employee would have received an elective deferral but for the negative election to defer. In effect, the 90-day clock works off of the employer’s payroll. This approach would be extremely difficult for employers and recordkeepers to administer. Many employers have numerous payroll periods for different classes of employees and we understand that recordkeepers typically do not keep track of payroll periods of the plan sponsor. Instead it is very common to receive contributions on a bundled basis, e.g., a single transfer that includes contributions attributable to more than one payroll period. In short, this rule could be extremely costly and complicated to administer and would require major systems changes at significant cost. The Council instead recommends that the 90-day clock run from the date the first contribution is received by the plan for a participant. This rule is administrable and will not require significant systems changes.”

ICI Testimony

Speaking on behalf of the ICI, Frank Nessel, a senior consultant with the Vanguard’s plan consulting group, addressed a number of issues that the IRS should clarify in the final regulations, “with the goal of providing flexibility in the design of the auto-enrollment feature and eliminating complexity that would deter employers (especially smaller employers) from implementing auto-enrollment.” According to Mr. Nessel, “The Service should clarify the notice timing requirements for EACAs and QACAs in plans with immediate eligibility. As proposed, initial notices would have to be provided to new hires on the first day of employment. We believe it would be as effective and protective of a new hire’s rights to provide the notice as soon as practicable on or after the employee becomes an eligible employee, provided the new hire has a reasonable opportunity to elect out of the arrangement prior to the first contribution being taken out of his or her paycheck.”

Mr. Nessel went on to state, “As proposed, the required content requirements for EACA notices may be too detailed to be effective. The notice should tell the participant how much he or she will contribute in the absence of an election, how these funds will be invested, and what the participant needs to do to opt out. Any additional information may detract from this important information. We recommend that the final regulation permit employers to cross-reference other plan documents for more detailed plan rules, and to allow employers who know their work forces to decide what other information to include in the notice beyond the minimum requirements.

“With respect to QACA and EACA investment elections, the final regulation should clarify that a participant should still be treated as an EACA or a QACA participant when he or she changes his or her investment election but does not change the deferral rate from the EACA or QACA deferral rate. We believe this is the right result because automatic enrollment under the Code refers to the deferral percentage, and not to investment elections.”

In conclusion, Mr. Nessel stated, “We also request clarification that a QACA is available for a plan that permits immediate eligibility for employee deferrals but imposes up to a one-year eligibility requirement for employer matching contributions. The ability to disaggregate the portion of the plan benefiting those with less than one year of service has been a permissible feature for safe harbor 401(k) plans. We believe that this same rationale should apply if a 401(k) plan satisfies the safe harbor requirements by means of a QACA.”

 

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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