The Pension Protection Act of 2006 contained several provisions relating to the ability of plan sponsors to automatically enroll their employees in 401(k), 403(b), and 457 plans. The IRS has now issued final regulations addressing the PPA's automatic enrollment provisions relating to "qualified automatic contribution arrangements" ("QACAs"), whereby a plan is deemed to satisfy certain annual nondiscrimination tests, and "eligible automatic contribution arrangements" ("EACAs"), whereby affected participants may withdraw certain elective deferrals without being subject to early distribution penalties.
Among the important provisions in the final regulations are the following:
- An EACA may not be implemented mid-year, despite public comments indicating that such an outcome would have been desirable.
- Plans wishing to maintain their QACA status must require automatically enrolled participants to contribute a minimum 3 percent contribution, with the amount of such contribution increasing each subsequent year, up to a maximum percentage. The final regulations have now helpfully clarified that, in the case of a rehire who terminated employment more than a year previously, the plan may automatically enroll such individual at the minimum 3 percent contribution rate, rather than take into account prior years of participation in determining the required contribution rate.
- Plans with a QACA feature may specifically provide that a participant's affirmative election will expire, and thus require a participant to make a new affirmative election if he or she wants the prior rate of elective contribution to continue. In the absence of a second affirmative election, the participant could be automatically enrolled at the plan's default percentage rate.
The provisions of the final regulations relating to QACAs apply retroactively to plan years beginning on or after Jan. 1, 2008. The provisions of the regulations relating to EACAs apply for plan years beginning on or after Jan. 1, 2010; but good-faith compliance is required for plan years beginning in 2008 and 2009.