On September 5, 2009, the IRS issued guidance on automatic contribution arrangements (“ACAs”), and also issued sample amendments which an employer may use to add an ACA to its plan. An ACA is generally an arrangement, under which an employee will automatically be treated as if he or she has elected to make contributions to an employer retirement plan. In the Special Edition, September 2009, employee benefits plans, the IRS says the following about this guidance and the sample amendments.
IRS Notice 2009-66 provides guidance, in the form of questions and answers, on including an ACA in a SIMPLE IRA plan. Some of the issues addressed include:
• the plan may increase an employee’s “default contribution percentage” (that is, the percentage of the employee’s pay which is remitted to the plan as a contribution) based on the number of years or portions of years for which “default contributions” (that is, the automatic contributions) have been made for the employee;
• the employer must, in addition to satisfying the SIMPLE IRA plan notice requirements, provide certain additional information to an employee who is eligible to participate in the ACA; and
• the plan may provide that default contributions be made only for an employee who is first eligible to participate in the SIMPLE IRA plan on or after the ACA’s effective date, and who does not make an affirmative election (including an affirmative election of zero) to have contributions made to the plan.
Revenue Ruling 2009-30 provides guidance on automatically increasing the level of default contributions under an ACA which is part of a 401(k) plan. The Ruling explains how a 401(k) plan may permit automatic increases in an employee’s “default contribution percentage” (again, the percentage of the employee’s pay which is remitted to the plan as a contribution), based on future increases in the employee’s base pay. The Ruling provides two examples on how a 401(k) plan can structure these automatic increases. The Ruling also holds that a plan may increase an employee’s default contribution percentage, on a date other than the first day of a plan year, without violating the “qualified percentage requirements” (including the uniformity and minimum percentage requirements) for qualified automatic contribution arrangements (which are sometimes called “QACAs”, and which serve as an automatic enrollment nondiscrimination safe harbor) or the uniformity requirement for eligible automatic contribution arrangements (which are sometimes called ” EACAs”, and which permit withdrawals of default contributions).
IRS Notice 2009-65 provides two sample plan amendments for adding an ACA to a 401(k) plan. The first sample amendment may be used to add a basic ACA, and the second sample amendment may be used to add an EACA. An employer may modify a sample amendment to conform to the specific terms and administrative procedures of its own 401(k) plan. A sample amendment must be adopted by the employer by the later of the end of the plan year in which the amendment is effective or, if applicable, the last day of the first plan year beginning on or after January 1, 2009. A later deadline may apply to governmental plans. The timely adoption of the sample amendment should be evidenced by a written document which is signed and dated by the employer. Affected employees must receive notice about the features of the amended plan within a reasonable period before the amendment is effective.
IRS Notice 2009-67 contains a sample amendment that a prototype sponsor of a SIMPLE IRA plan (using a designated financial institution) may use to draft an amendment to add an ACA to its plan. The prototype sponsor may tailor the sample amendment to the terms and administrative procedures of its own plan. The prototype sponsor must furnish a copy of the amended prototype SIMPLE IRA plan document to each adopting employer, regardless of whether the employer will use an ACA. An employer that wishes to add an ACA to its plan must adopt the amendment, provided by the prototype sponsor, before the ACA’s effective date. The timely adoption of this amendment should be evidenced by a written document signed and dated by the employer and the designated financial institution.