Auto Enroll Final Regs — Part Four
Rev. 06/26/09; E-mail Alert 2009-9

1. 90-day count starting point

§414(w)(2) limits the period for the special election to withdraw default elective contributions to the first 90 days after the date of the first default contribution under the EACA. The regulations provided that the 90-day count starts from the date the first default deferral would otherwise have been included in gross income. 

This date is used for other relevant Code provisions, such as the application of the section 402(g) limitation.

2. Employer may opt for less than a 90-day period

If an employer is concerned about inadvertently permitting withdrawal elections beyond the 90-day period due to misidentifying the date of the first default elective contribution as defined under the regulations, the plan is permitted to limit the period during which the election can be made to less than 90 days. A plan is permitted to set an earlier deadline for the election to withdraw default elective contributions. However, if a plan offers a permissible withdrawal for covered employees, the election period for the covered employees must be at least 30 days.

3. 90-day period based on aggregation of all EACAs under a plan

For this purpose, all EACAs under the plan must be aggregated.

4. Aggregation not required if:
1. the plan provides for multiple EACAs to cover different employees in different portions of the plan and these portions of the plan are mandatorily disaggregated under section 410(b).

• Thus, in the case where a plan that is subject to the rules of section 410(b) has separate EACAs for different groups of collectively bargained employees or different employers in a multiple employer plan, the date for determining the first default elective contribution is determined with respect to each EACA within the separate disaggregated plan.

5. Exception for employee who had no default deferrals under an EACA for an entire plan year

The final regulations provide that for purposes of determining the date of the first default elective contribution, a plan is permitted to treat an employee who for an entire plan year did not have default elective contributions made under the EACA as if the employee had not had such contributions for any prior plan year as well.

6. Permissible withdrawal may not be restricted by later affirmative election

An employer is not permitted to limit the permissible withdrawal election to those employees who are automatically enrolled and who do not make a subsequent affirmative election of an amount (other than zero) within the 90-day election period.

Under a 401(a) plan or a 403(b) plan, an employer is not permitted to condition an employee’s right to take a permissible withdrawal on the level of the employee’s deferral election under the plan. Thus, an employee’s permissible withdrawal rights may not be restricted based upon the employee’s subsequent affirmative election.

7. Latest effective date of the permissible withdrawal request

The final regulations modify the proposed rule to provide that the latest effective date of the permissible withdrawal election cannot be after the earlier of:

• the pay date for the second payroll period beginning after the election is made, or
• the first pay date that occurs at least 30 days after the election is made.

Of course, a plan may permit an earlier effective date.

8. By when must the permissible withdrawal amount be distributed?

The final regulations clarify that the permissible withdrawal distribution must be made in accordance with the plan’s ordinary timing procedures for processing distributions and making distributions.

Thus, the permissible withdrawal distribution should be processed and distributed no differently than any other distribution permitted under the plan.

      9. Fee for permissible withdrawal may not be higher than any other distribution of cash.

The final regulations clarify that the plan cannot charge a higher fee for a distribution under section 414(w) than would apply to any other distributions of cash. These amounts are subject to section 3405(a).

1. The final regulations clarify that the forfeiture applies to any matching contributions that have been allocated to the participant’s account, adjusted for allocable gain or loss.
   
   
2. The plan is permitted to provide that matching contributions will not be made with respect to a permissible withdrawal [§1.414(w)-1(c)] if the withdrawal has been made prior to the date the matching contributions would otherwise be allocated.

III. Other Issues

A. Other automatic contribution arrangements

Many employers have previously adopted ACAs as originally described in prior guidance, [i.e. RR 2000-8]. This prior guidance, which was reflected in regulations under section 401(k) issued in 2004, permitted employers to automatically enroll employees in a section 401(k) plan. The final regulations do not affect any ACA that is not intended to be a QACA or an EACA.

1. Correction rules for excess contributions and excess aggregate contributions provided in section 902(e) of PPA’06.  Including:
1. the change in the year of inclusion in income for distributed excess contributions to the year of distribution; and
2. the elimination of the requirement to include gap period income for a distribution that is made to correct an ADP or ACP failure.

2. These regulations do not reflect:
1. the change made by section 109(b)(3) of WRERA that eliminates the requirement to include gap period income for a distribution of an excess deferral under section 402(g);
2. the additional time to correct excess contributions under a SARSEP that includes an EACA;
3. the tax treatment of excess contributions and earnings thereon under a SARSEP; and
4. guidance on SIMPLE IRA plans that include an EACA.

Effective Date
Except as provided in §§1.401(k)-3(j)(1)(i) and 1.401(m)-2(a)(6)(ii), the final regulations relating to QACAs (§§1.401(k)-2, 1.401(k)-3, 1.401(m)-2, and 1.401(m)-3) apply to plan years beginning on or after January 1, 2008.

The regulations relating to EACAs (§§1.402(c)-2, 1.411(a)-4, 1.414(w)-1, and 54.4979-1) apply for plan years beginning on or after January 1, 2010.

For plan years that begin in 2008, a plan must operate in accordance with a good faith interpretation of section 414(w). For this purpose, a plan that operates in accordance with the proposed regulations under §1.414(w)-1 or these final regulations will be treated as operating in accordance with a good faith interpretation of section 414(w).

Bill Grossman, ERPA, QPA

For more information on automatic contribution arrangements, check out our eSeminar on Automatic Enrollment Plans or our 401(k) Update eSeminar.

To learn more, call 973-492-1880 or e-mail info@mhco.com.