On February 23, 2009, the IRS issued final regulations related to qualified automatic contribution arrangements (“QACAs”)—i.e., auto enrollment arrangements designed to meet the 401(k) safe harbor rules—and eligible automatic contribution arrangements (“EACAs”)—i.e., auto enrollment arrangements that permit withdrawals within the first 90 days of enrollment. The final regulations include several modifications to the proposed regulations issued November 8, 2007, as well as changes pursuant to the Worker, Retiree, and Employer Recovery Act of 2008. For a more detailed discussion of the proposed regulations, including a general discussion of QACAs and EACAs, see our November 9, 2007, legal alert. This legal alert highlights the key provisions of the final regulations.
Notice Requirement Where Employee’s Initial Eligibility Date Is Date of Hire
The proposed regulations would have required notice for QACAs and EACAs to be issued to employees no later than the date they become eligible to participate in the plan. Many employers questioned the feasibility of meeting this requirement if an employee’s initial eligibility date is his or her date of hire. In response, the final regulations provide that, if it is not practicable to provide the required QACA or EACA notice on or before an employee’s initial eligibility date, notice will be deemed timely if (i) it is provided as soon as practicable after the initial eligibility date, and (ii) the employee is permitted to elect to defer from all types of deferrable compensation under the plan that he or she earns beginning on the initial eligibility date. Notice must therefore be provided before the pay date for the payroll period that includes the employee’s initial eligibility date.
Midyear Adjustments to Minimum Contribution Percentage
In order to qualify as a QACA, an automatic contribution arrangement must apply a minimum contribution percentage uniformly to all employees. The proposed regulations provided that an arrangement would meet this requirement even if the minimum percentage varied with the number of years the eligible employee had participated in the QACA. The final regulations expand this exception, permitting employers to increase the minimum contribution percentage midyear so long as (i) the percentage is uniform based on the number of plan years or portions of plan years since an employee first had a default contribution made on his or her behalf, and (ii) the minimum percentage requirement is satisfied for the entire plan year. This provision permits employers to increase the minimum contribution percentage at the time they make salary increases or provide performance evaluations.
Proper Contribution Percentage for Rehired Employees
The final regulations also provide guidance regarding the proper minimum contribution percentage for a rehired employee. If an employee is rehired following a termination lasting longer than an entire plan year, the plan can start him or her over at the minimum contribution percentage applicable to an employee’s initial period under the plan, regardless of the percentage applicable to the rehired employee at the time of his or her termination. If a terminated employee is reemployed after less than a full plan year, QACA contributions must resume using the minimum contribution percentage applicable to the employee at the time of his or her termination.
EACA Permissible Withdrawal Period
The period during which an employee is permitted to elect to withdraw his or her default EACA contributions is limited to the first 90 days after the date of the employee’s first default contribution. The final regulations confirm that the date of the employee’s first default contribution is the date that the compensation subject to the default contribution would otherwise have been included in the employee’s gross income. The IRS rejected requests that, for administrative ease, the 90-day election period be permitted to run beginning on the date the first default contribution is actually received by the plan. Instead, a plan that is concerned about inadvertently permitting a withdrawal election outside the 90-day period may limit the permissible withdrawal period to less than 90 days.
The final regulations also provide that, for purposes of determining the date of the employee’s first default contribution, a plan may treat an employee who for an entire plan year had no default EACA contributions as if the employee had no default EACA contributions in any prior plan year, as well. Thus, the final regulations seem to provide an additional 90-day withdrawal period to terminated employees who return to work after an absence of an entire plan year and other employees who do not have a default contribution in effect for at least a year.
Other Key Provisions of the Final Regulations
- Plans are permitted to provide for the expiration of an affirmative election and then automatically enroll an employee who fails to make a second affirmative election after the expiration occurs.
- The final regulations confirm that only those employees who had an affirmative election in place before the effective date of the QACA may be excluded from having a default election applied to them. The IRS rejected requests that employers be permitted to assign an affirmative “zero” election to employees with no affirmative election on record prior to the QACA effective date.
- If a plan does not reinstate an employee’s affirmative election following a six-month deferral suspension period pursuant to a hardship withdrawal, the employer must automatically enroll the employee.
- EACAs are required to cover only those employees specified in the plan as being covered by the EACA, and limiting coverage would allow the plan administrator to avoid having to provide annual notice to employees who have affirmatively elected to make contributions. However, all eligible employees must be covered by the EACA for the entire plan year (or the portion of the plan year that they are eligible) in order for the EACA to utilize the 6-month extension for correcting excess contributions and excess aggregate contributions for the year.
- The final regulations confirm that an EACA may not be implemented midyear.
- A plan may provide that matching contributions will not be made with respect to an EACA withdrawal that is made before the date that matching contributions otherwise would have been allocated.
- Multiemployer plans and multiple employer plans may maintain separate EACAs for different groups of collectively bargained employees (or different employers in the case of a multiple employer plan) with a minimum contribution percentage that differs across EACAs. The minimum percentage within each such EACA must be uniform, however.
- A distribution pursuant to a permissible EACA withdrawal must be made according to the plan’s ordinary timing procedures for processing and making distributions.
- An EACA is no longer required to use a qualified default investment alternative (“QDIA”) as its default investment option.
The final regulations do not apply to automatic contribution arrangements not intended to be either QACAs or EACAs. For QACAs, the final regulations apply for plan years beginning on or after January 1, 2008. For EACAs, the final regulations apply for plan years beginning on or after January 1, 2010.