IRS Issues Final Regs on Automatic Contribution Arrangements

The Service on Tuesday issued final regulations on automatic contribution arrangements for 401(k) and other eligible plans. The regulations (TD 9447) adopt with modifications the 2007 proposed regulations (REG-133300-07) providing guidance on implementing provisions of the Pension Protection Act of 2006 and the Worker, Retiree, and Employer Recovery Act of 2008.

Under these provisions, when an employee who is otherwise eligible to participate in an employer’s cash or deferred arrangement (CODA) fails to make an election to do so, an employer may make automatic contributions to the plan on the employee’s behalf. Generally, such employees are automatically enrolled and a default percentage of their pay withdrawn, contributed and invested in a prescribed manner. Previous legal and practical hurdles to automatic enrollment had included nondiscrimination requirements, state laws prohibiting automatic paycheck deductions and concerns about fiduciary responsibility.

The final regulations clarify how automatic contribution amounts are determined in an employee’s initial period and when the employee has made an earlier affirmative election that is no longer in effect. They also

• Prescribe rules for a midyear increase in the default percentage of an automatic contribution.
• Clarify that safe harbor nonelective and matching contributions made under a qualified automatic contribution arrangement (QACA) are subject to withdrawal restrictions. A QACA is a CODA that is deemed to meet nondiscrimination rules by conforming to the notice, automatic deferral, matching or nonelective contribution, and other requirements of section 401(k)(13).
• Provide guidance for how a multiemployer plan may meet the uniformity requirement for a section 414(w) eligible automatic contribution arrangement (EACA). An EACA can allow an employee to make “permissible withdrawals” under section 414(w)(2)(A) within 90 days after the first elective contribution. Such withdrawals, although immediately includible in the gross income of the employee, are not subject to the usual 10% early withdrawal penalty.
• Allow EACAs to set a deadline for permissible withdrawals earlier than 90 days.

The final regulations apply to plan years beginning on or after Jan. 1, 2008, with respect to QACAs and Jan. 1, 2010, with respect to EACAs.