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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 guidance in Rev. Rul. 2009-30 clarifying the use of escalator provisions in 401(k) plan automatic contribution arrangements that allow for an adjustment in the amount of an employee's default contributions based on increases in pay.
Specifically, the IRS has provided two scenarios illustrating circumstances under which: (1) an employee's default contribution percentage may automatically increase after the first year of participation in an automatic contribution arrangement, based in part on increases in the employee's plan compensation; and (2) default contributions may be made without violating the applicable uniformity and minimum percentage requirements, pursuant to qualified automatic contribution arrangements (QACAs) and eligible automatic contribution arrangements (EACAs), under which the default contribution for all employees increases on a date other than the first day of the plan year.
Automatic adjustments based on increases in plan compensation
Under the first scenario, a profit-sharing plan that is not intended to be QACA or an EACA allows for automatic contributions with a default contribution percentage of 4% for the first plan year. In addition, for plan years after the first plan year of the eligible employee's participation in the arrangement, the default contribution percentage is automatically increased, beginning with the first pay period that begins on or after the employee's employment anniversary date. The increase in the default contribution percentage is equal to the greater of (1) 1 percentage point, or (2) a number of percentage points calculated as 30% of the percentage increase in the employee's base pay for such first pay period, over the eligible employee's base pay for the immediately preceding pay period (rounded to the nearest whole percentage). However, the default contribution percentage may never exceed 11%.
Initially, the IRS noted that the default contribution percentage may be increased or otherwise changed over time, pursuant to a plan-specified schedule. Accordingly, default contributions will not cease to be elective contributions merely because default contribution percentages increase, and the increases occur in an amount and at a time that reflect future increases in pay.
The arrangement does result in default contribution percentages that are not a uniform percentage of compensation for all employees. However, this fact is not prohibitive, the IRS advised, because the uniformity requires is not applicable to automatic contribution arrangements that are not intended to be QACAs or EACAs.
Increasing default contribution percentage other than on first day of plan year
The second scenario concerns a profit-sharing plan that is intended to be a QACA and an EACA, under which, for plan years after the first plan year of an employee's participation, the default contribution percentage is automatically increased, beginning with the first period that begins on or after April 1. The increase in the default contribution percentage is equal to 1 percentage point, but may not exceed 10%.
Initially, the IRS explained, a default contribution percentage under a QACA must be uniform for all employees. However, the default contribution may vary based on the number of years since the beginning of the initial period of participation for an employee.
Similarly, the IRS noted that the default contribution election under an EACA must be a uniform percentage of compensation. However, the default contribution percentage may vary based on the number of years since the beginning of the employee's initial period of participation.
The IRS concluded that the default contributions are exempt from the uniformity requirements applicable to QACAs and EACAs because the increases apply in the same manner to all eligible employees for whom the same number of years or portions of years have elapsed since the default contributions were first made for them under the arrangement.
In addition, the default contribution percentage for each plan year after the first plan year satisfies the applicable minimum default contribution requirements. The increased default contribution percentage of 4% applies earlier than required under the governing regulations, the IRS explained, as it begins with the first pay period that begins on or after April 1 of the plan year following the first plan year.
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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