On November 7, 2007, the IRS released proposed regulations for automatic contribution arrangements that could be relied upon pending the issuance of final regulations. To the extent the final regulations are more restrictive, they will not be applied retroactively. On February 24, 2009, the Treasury issued final regulations. The QACA provisions are effective January 1, 2008. The EACA provisions are effective January 1, 2010, or later. Following is a summary of the changes in the final regulations.
This is part one of a two part series on the final regulations. This part deals with the qualified automatic contribution arrangement.
A. Minimum percentage requirement
The final regulations clarify that the minimum percentage for the initial period is based on when the employee first has contributions made pursuant to a default election under the QACA. Thus, if an employee makes an affirmative election before the default contribution would have begun, then the initial period does not begin for the employee. The minimum percentages are increased for plan years after the initial period.
1. Rehires and Minimum Percentage Requirement
The minimum percentages are determined without regard to whether an employee has continued to be eligible to make contributions under the plan. Thus, the minimum percentage is generally determined based on the number of years since the date the employee first had default contributions made under the QACA.
Terminated employees who remain terminated for a full plan year after the plan year during which the termination occurred may be treated as new employees for purposes of the minimum percentage requirement at automatic enrollment. A plan is permitted to treat an employeem, who for an entire plan year did not have contributions made pursuant to a default election under the QACA, as if the employee had not had such contributions for any prior plan year as well. For example, if an employee terminates in one plan year, remains terminated for a full plan year, and is rehired in a subsequent plan year, the plan is permitted to provide that a new initial period begins after the employee is rehired, regardless of whether the employee had in fact had contributions made pursuant to a default election under the QACA in some earlier plan year.
2. Affirmative election duration period may be limited by plan. Automatic enrollment applies for periods during which the affirmative election is not in effect. A plan could specifically provide that an affirmative election expires and, thus, require an employee 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 employee will be automatically enrolled at the plan’s default percentage (which must meet the minimum percentage requirement described in the preceding paragraph). For example, if an employer has a QACA beginning in 2009 and the plan provides that all affirmative elections in effect on December 31, 2010 expire on that date, then, if the QACA continues into 2011, all eligible employees who do not make a new affirmative election will be automatically enrolled under the QACA.
a. Hardship suspension issue. If an employee who made an affirmative election takes a hardship withdrawal and elective contributions are suspended for 6 months, then, if the plan does not reinstate the affirmative election at the end of the 6 months, the employer must automatically enroll the employee.
3. Compensation for purposes of default contributions. For plan years beginning on or after January 1, 2010, compensation for purposes of determining default contributions means safe harbor compensation as defined in §1.401(k)-3(b)(2). This is the definition of compensation for a safe harbor 401(k) plan which means it must satisfy 414(s) and may be for the full plan year or while a participant, as defined in the plan.
B. Uniformity requirement
1. Background
The default percentage must be applied uniformly [§401(k)(13)(C)(iii)]. The proposed regulations provided that the percentage may vary based on the number of years an eligible employee participates in the QACA. The rate of deferrals in effect immediately prior to the effective date of the default percentage under the QACA is not reduced; the rate of elective contributions is limited so as not to exceed the limits of sections 401(a)(17), 402(g) (determined with or without catch-up contributions described in section 402(g)(1)(C) or 402(g)(7)), and 415; or the default election is not applied during the period an employee is not permitted to make elective contributions in order for the plan to satisfy the requirements of §1.401(k)-3(c)(6)(v)(B).
2. QACA increase in the default percentage in the middle of the plan year to coincide with salary increases or performance evaluations.
The plan may provide for an increase of the default percentage mid-year, as long as the percentage is uniform based on the number of years or portions of years since an employee first had contributions made pursuant to a default election and satisfies the minimum percentage requirement throughout the plan year.
C. Notice timing requirement
1. Generally the timing rules are the same as the safe harbor notice.
The final regulations [under §401(k)(12)] provide that the determination of whether the notice satisfies the timing requirement is based on all of the relevant facts and circumstances. The timing requirement is deemed satisfied if at least 30 days (and no more than 90 days) before the beginning of each plan year, the notice is provided to each eligible employee.
In the case where an eligible employee is not provided the notice within this 30-90 day period 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 eligible and no later than the date the employee becomes eligible.
2. Immediate eligibility upon hire and notice timing.
Under §401(k)(13)(E)(ii), the notice must be provided sufficiently early to provide the employee with a reasonable period of time between receiving the notice and the first default contribution to make an affirmative election to defer a different amount or percentage.
Thus, there was a concern about meeting the notice requirement for employees who are eligible to participate in the plan immediately upon hire.
The final regulations modify the deemed satisfaction of timing requirement set forth in §1.401(k)-3(d)(3)(ii). Thus, if it is not practicable to provide the notice on or before the date specified in the plan for the employee to become eligible; the notice will be treated as provided timely if it is provided ASAPe after that date and the employee is permitted to elect to defer beginning on that date. Thus, an employer is required to provide the notice to the employee prior to the pay date for the payroll period that includes the date the employee becomes eligible. This change applies to the safe harbor described in section 401(k)(12), as well as section 401(k)(13).
3. Rules for when the default election must first become effective.
Under §401(k)(13)(E)(ii)(III), the default election must be effective no earlier than a reasonable period of time after the receipt of the notice (in order to provide the employee with a reasonable period of time to make an affirmative election). However, the final regulations provide that the default election must be effective no later than the earlier of the pay date for the second payroll period that begins after the date the notice is provided or the first pay date that occurs at least 30 days after the notice is provided.
Notwithstanding any delay in when the first default contribution is made, nonelective contributions that are based on a full year’s contributions and the rate of matching contributions that varies based on compensation must be based on the safe harbor compensation earned since the participant was first eligible under the plan.
D. Exclusion of current affirmative elections from automatic enrollment
1. Affirmative elections in effect immediately before QACA may be used to exclude participants from automatic enrollment.
An ACA does not fail to be a QACA because the default election is not applied to an employee who was eligible under the CODA (or a predecessor arrangement) immediately prior to the effective date of the QACA and on that effective date had an affirmative election in effect (that remains in effect).
NOTE: Some commentators requested that employers be permitted to treat employees who did not affirmatively elect to make elective contributions under the plan as though they had affirmatively elected zero because it would be administratively difficult to determine which employees had affirmative elections in effect prior to the effective date of the QACA.
2. The regulations do not expand the exception for automatically enrolling current employees to employees who have not made an affirmative election.
§401(k)(13)(C)(iv)(II) permits only those employees who had an affirmative election in effect immediately before the QACA became effective to be excluded from having a default election apply to them.
E. Other topics
1. Safe harbor contributions under a QACA are not eligible for hardship.
The final regulations clarify that these safe harbor contributions are subject to the withdrawal restrictions found in §1.401(k)-1(d) that apply to QNECs and QMACs. Thus, the maximum distributable amount under §1.401(k)-1(d)(3)(ii) does not include earnings, QNECs, QMACs, or these safe harbor contributions.
2. QACA Safe harbor contributions are for all eligible employees
The final regulations retain the requirement that all eligible employees must receive safe harbor matching contributions or nonelective contributions, whichever is applicable. The special treatment under section 401(k)(13)(C)(iv) for employees who have an affirmative election in effect does not affect whether safe harbor matching contributions or nonelective contributions are required to be made for those employees.
