IRS Issues Final Rules on Automatic Contribution
Arrangements
February 24, 2009 (PLANSPONSOR.com) - The Internal
Revenue Service on Tuesday published final rules relating to
automatic contribution arrangements to reflect provisions of
the Pension Protection Act and the Worker, Retiree and
Employer Recovery Act of 2008.
In the final regulations, the IRS addressed a
question on 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.
Notification Requirements
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. This
presented a problem for plans in which participants were
immediately eligible for participation upon hire
(see
IRS Issues Additional Auto Enrollment
Guidance
).
The IRS' final regulations addressed the
problem by providing that "if it is not practicable
for the notice to be provided on or before the date
specified in the plan that an employee becomes eligible,
the notice will nonetheless be treated as provided timely
if it is provided as soon as practicable after that date
and the employee is permitted to elect to defer from all
types of compensation that may be deferred under the plan
earned beginning on that date."