In the final regulations, the IRS addressed a question of whether employers should start rehired employees subject to qualified automatic contribution arrangements at the deferral percentage at which they were deferring when they terminated, or at the minimum deferral percentage under the arrangement. The IRS said that if the employee has been terminated for one year or more, then the plan sponsor can automatically enroll the employee in the plan at the minimum deferral percentage under the arrangement upon rehire.
The final rules also allow employers to provide for an automatic contribution percentage escalation in the middle of the plan year and not just at the beginning of each plan year to coincide with salary increases or performance evaluations, as long as the provision is applied uniformly to all employees.
The rules for qualified automatic contribution arrangements require that employees be provided notice of their automatic enrollment in the sponsor’s plan at 30 days and no more than 90 days prior to eligibility and annually prior to the beginning of each plan year (see “(Non)Testing Grounds’). This presented a problem for plans in which participants were immediately eligible for participation upon hire (see “Auto Enrollment Guidance Issued’).
The IRS’ final regulations addressed the problem by saying that if it is not feasible for the notice to be provided on or before the eligibility date, the notice will still be treated as provided timely, as long as the notice is provided as soon as it is feasible, and the employee is permitted to elect to defer all forms of compensation that may be deferred beginning on that date.
Other Rules for Automatic Contribution Arrangements
Other provisions of the final rules for qualified automatic contribution arrangements (QACAs) and eligible automatic contribution arrangements (EACAs) include:
- The safe harbor nonelective and matching contributions made under a QACA are not eligible for hardship withdrawal;
- With respect to the correction of excess contributions for a plan year beginning on or after January 1, 2010, the final regulations provide that a plan that contains an EACA is entitled to the extended six-month period for correcting excess contributions and excess aggregate contributions without incurring an excise tax under section 4979, only if all eligible NHCEs (non-highly compensated employees) and eligible HCEs (highly compensated employees) are covered employees under the EACA for the entire plan year (or the portion of the plan year that the employees are eligible employees);
- The final rules do not permit that the uniformity requirement to be eased if the plan is a multiemployer plan or a multiple employer plan, or if the sponsor wants to have different default contributions for collectively bargained and non-collectively bargained employees. However, the IRS says plan sponsors can accomplish a similar goal by establishing separate EACAs for each of these separate groups;
- 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.
The IRS said the rules relating to QACAs apply for plan years beginning on or after January 1, 2008, and the rules relating to EACAs apply for plan years beginning on or after January 1, 2010.
The final rules are here.