The proposed regulations for automatic enrollment arrangements are out, and the clock is ticking.
For calendar year plans implementing a qualified automatic contribution arrangement (QACA) or an eligible automatic contribution arrangement (EACA) beginning on January 1, 2008, the time period for providing employees with notice of the QACA or EACA ends on December 1, 2008.
When I need to understand regulations quickly, I will write a quick FAQ to organize the language of the key provisions into a Q&A format to help me understand them. This is part of my quick FAQ about the new Proposed Regulations on Automatic Contribution Arrangements, just released by the IRS today, covering the provisions on eligible automatic contribution arrangements (EACAs). Tomorrow, I will share my quick FAQ on qualified automatic contribution arrangements (QACAs).
What is an automatic contribution arrangement (ACA)?
An automatic contribution arrangement is a cash or deferred arrangement within the meaning of section 1.401(k)-1(a)(2) that provides that in the absence of an eligible employee’s affirmative election, a default applies under which the employee is treated as having made an election to have a specified contribution made on his or her behalf under the plan. Proposed Treas. Reg. 1.401(k)-3(j)(1)(ii).
What is an eligible automatic contribution arrangement (EACA)?
An eligible automatic contribution arrangement is an automatic contribution arrangement under an applicable employer plan that, for the plan year, satisfies the uniformity requirement under Proposed Treas. Reg. 1.414(w)-1(b)(2), the notice requirement under Proposed Treas. Reg. 1.414(w)-1(b)(3), and the default investment requirement under Proposed Treas. Reg. 1.414(w)-1(b)(4).
What is the uniformity requirement for EACAs?
The uniformity requirement under Proposed Treas. Reg. 1.414(w)-1(b)(2) is that an eligible automatic contribution arrangement must provide that the default elective contribution is a uniform percentage of compensation. An arrangement does not violate the uniformity requirement merely because the percentage varies in a manner that is permitted under Treas. Reg. 1.401(k)-3(j)(2)(iii), except that the rules of Treas. Reg. 1.401(k)-3(j)(2)(iii)(A) and 1.401(k)-3(j)(2)(iii)(B) are applied without regard to whether the arrangement is intended to be a QACA. See Proposed Treas. Reg. 1.414(w)-1(b)(2). The preamble to the proposed regs state that the cash or deferred arrangement does not fail to satisfy the uniformity requirement merely because an employee is not automatically enrolled during a period that the employee is not permitted to make elective contributions because of the requirement to suspend elective contributions for a 6-month period following a hardship distribution. See page 11 of the proposed regs.
Can the notice for the EACA be distributed electronically?
The notice must be in writing, however, see Treas. Reg. 1.401(a)-21 for rules permitting the use of electronic media to provide applicable notices. Proposed Treas. Reg. 1.414(w)-1(b)(3)(i). See Proposed Treas. Reg. 1.414(w)-3(b)(3)(i).
What information must be included in the notice for the EACA?
The notice must include the provisions found in Treas. Reg. 1.401(k)-3(d)(2)(ii) to the extent those provisions apply to the arrangement. A notice is not considered sufficiently accurate and comprehensive unless the notice accurately describes – (A) the level of elective contributions which will be made on the employee’s behalf if the employee does not make an affirmative election; (B) the employee’s rights to elect not to have default elective contributions made to the plan on his or her behalf or to have a different percentage of compensation or amount of elective contributions made to the plan on his or her behalf; (C) how contributions made under the arrangement will be invested in the absence of any investment election by the employee; and (D) the employee’s rights to make a permissible withdrawal, if applicable, and the procedures to elect such a withdrawal.
When must current employees be provided with notice of the EACA?
The timing requirement of Proposed Treas. Reg. 1.414(w)-3(b)(3)(iii) is satisfied if the notice is provided within a reasonable period before the beginning of each plan year (or, in the year an employee becomes an eligible employee, within a reasonable period before the employee becomes an eligible employee). In addition, a notice satisfies the timing requirements of Proposed Treas. Reg. 1.414(w)-3(b)(3) only if it is provided sufficiently early so that the employee has a reasonable period of time after receipt of the notice and before the first elective contribution is made under the arrangement to make the election described under paragraph (b)(ii)(A) of this section. This timing requirement is satisfied if the notice is provided to each eligible employee at least 30 days and no more than 90 days before the beginning of each plan year. See Proposed Treas. Reg. 1.414(w)-1(b)(3)(iii)(B).
When must new employees be provided with notice of the EACA?
If an employee does not receive the notice at least 30 days and no more than 90 days before the beginning of the plan year because the employee becomes eligible after the 90th day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes an eligible employee (and no later than the date the employee becomes an eligible employee). See Proposed Treas. Reg. 1.414(w)-1(b)(3)(iii)(B).
Can an employee become automatically enrolled if they make an affirmative election to make no deferral or make an affirmative election to defer a different amount?
No. Proposed Treas. Reg. 1.401(k)-3(j)(1)(ii) states that the default election ceases to apply with respect to an eligible employee if the employee makes an affirmative election (that remains in effect) to (A) have elective contributions made in a different amount on his or her behalf (in a specified amount or percentage of compensation); or (B) not have any election contributions made on his or her behalf.
If an employee becomes automatically enrolled due to an EACA, and does not want to be automatically enrolled, when can the employee take a distribution of the amount withheld pursuant to the EACA?
Sections 414(w)(1) and 414(w)(2) provide that an applicable employer plan that contains an EACA is permitted to allow employees to elect to receive a distribution equal to the amount of elective contributions (and attributable earnings) made with respect to the employee beginning with the first payroll period to which the eligible automatic contribution arrangement applies to the employee and ending with the effective date of the election. The election must be made within 90 days after the date of the first elective contribution with respect to the employee under the arrangement. Section 414(w)(1)(A) and 414(w)(1)(B) provide that the amount of the distribution is includible in gross income for the taxable year in which the distribution is made, but is not subject to the additional income tax under section 72(t). See page 7 of preamble to the proposed regulations. See page 18 of preamble to Proposed Regulations.
Does the 90-day withdrawal period start before January 1, 2008, so that for an automatic contribution arrangement implemented on or after October 1, 2007, the 90-day withdrawal window ends immediately after the January 1, 2008, EACA implementation date?
No. Under section 414(w)(2)(B), the election to withdraw the contributions that were made under an EACA must be made within 90 days of the “first elective contribution with respect to the employee under the arrangement.” The proposed regulations would define the arrangement for this purpose as the EACA so that the withdrawal option could apply to employees previously eligible under the CODA (including a CODA that is an automatic contribution arrangement but was not an EACA). Because section 414(w) only applies to plan years beginning on or after January 1, 2008, an automatic contribution arrangement can only become an EACA on or after that date. Accordingly, a withdrawal election under 414(w) can only apply to elective contributions made after that date. The proposed regulations would provide that the 90-day window for making the withdrawal election begins on the date on which the compensation that is subject to the cash or deferred election would otherwise have been included in gross income. In addition, the proposed regulations would provide that the effective date of the election must be no later than the last day of the payroll period that begins after the date of the election.
What is the correction period for excess contributions and excess aggregate contributions under an EACA?
6 months. Section 4979 provides an excise tax on excess contributions (within the meaning of section 401(k)(8)(B)) and excess aggregate contributions (within the meaning of section 401(m)(6)(B)) not distributed within 2 1/2 months after the close of the plan year for which the contributions are made. Section 902 of PPA ’06 amended section 4979 to lengthen this 2 1/2 month correction period for excess contributions and excess aggregate contributions under an EACA to 6 months. Thus, in the case of an EACA, the section 4979 excise tax does not apply to any excess contributions or excess aggregate contributions which, together with income allocable to the contributions, are distributed or forfeited (if forfeitable) within six months after the close of the plan year. See page 9 of the preamble to the Proposed Regulations.
I will be consolidating my notes and posting it in a PDF, probably on Friday. (hat tip to BenefitsLink.com for the copy of the proposed regs)
[tags]Pension Protection Act, automatic enrollment, QACA, EACA, ACA, IRS, proposed regulations, 414(w), elective deferrals, benefitslink, ERISA[/tags]
