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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.
Proposed regulations issued by the IRS in November 2007 governing Eligible Automatic Contribution Arrangements (EACAs) (CCH Pension Plan Guide ¶20,262E) should be modified to specifically allow for mid-year elections, according to practitioner comments at a May 19, 2008 IRS hearing on the regulations. In addition, commentators suggested that the proposed regulations be amended to narrow both the application of the EACA notice requirement and the amount of information required to be reported.
The Pension Protection Act of 2006 (PPA; P.L. 109-280), effective for plan years beginning after December 31, 2007, authorizes eligible automatic contribution arrangements that will 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. However, employees must receive an annual notice of their rights under the arrangement including the right not to participate in the arrangement or the right to elect to make contributions at a different percentage of compensation. In addition, employees are allowed a 90-day window within which to request refunds of automatic contributions made under the arrangement. The distributions will be subject to income tax (but not penalty tax) and matching contributions will be forfeited.
Jan Jacobson, senior counsel, American Benefits Council, urged the IRS to clarify that mid-year eligible automatic contribution arrangements are permitted. The proposed regulations are not clear on the issue but seem to imply that a full plan year is required to implement an EACA. According to Jacobson, 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.” The change is required, Jacobson stated, because “many plan sponsors have expressed an interest in implementing automatic contribution arrangements during the plan year.”
Mary Podesta, senior counsel for the Investment Company Institute (ICI), further noted that, while the proposed regulations may suggest that EACAs be implemented for full plan years only, the PPA does not contain such a requirement. In urging the IRS to clarify the point in the final regulations, Podesta stressed that the ICI believes “a plan should be permitted to implement an EACA at mid-year so that employees can begin saving for their retirement earlier.”
David Certner, legislative counsel of AARP, similarly observed in written comments that neither congressional intent nor policy reasons prohibit automatic enrollment from beginning mid-year. An “unduly rigid interpretation of the statutory notice provisions,” Certner asserted, “would run counter to the intent of the PPA automatic enrollment provisions to encourage participation.”
The benefits of an eligible automatic contribution arrangement to an employer and an employee are conditioned on compliance with an annual notice requirement. Specifically, the administrator of a plan containing an eligible automatic contribution arrangement must, within a reasonable period of time before each plan year provide each employee to whom the arrangement applies with notice of the employee’s rights and obligations under the arrangement. The notice must be sufficiently accurate and comprehensive to apprise employees of their rights and be written in manner that is calculated to be understood by the average employee to whom the arrangement applies.
Aliya Wong, director of pension policy, U.S. Chamber of Commerce, charged that it is unclear whether an EACA notice must be provided to all eligible employees, regardless of whether they are subject to the automatic enrollment provisions of the EACA, or only to those eligible employees who are subject to the automatic enrollment provisions. Wong recommended that the final regulations limit application of the notice to those eligible employees who are subject to the automatic enrollment provisions.
Maureen Darmanin, vice president, Fidelity, alleged in written testimony that the proposed regulations’ wholesale application of the notice content requirements to qualified automatic contribution arrangements (QACA) and EACAs would create unnecessary burdens for an employer that includes a QACA or EACA in its plan. Darmanin, accordingly, suggested that the notice content requirements be “relaxed to contain only those items germane to the cash or deferred election itself.”
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