[Federal Register Volume 74, Number 35 (Tuesday, February 24, 2009)]
[Rules and Regulations]
[Pages 8200-8214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-3716]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 54
[TD 9447]
RIN 1545-BG80
Automatic Contribution Arrangements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to automatic
contribution arrangements. These regulations affect administrators of,
employers maintaining, participants in, and beneficiaries of section
401(k) plans and other eligible plans that include an automatic
contribution arrangement.
DATES: Effective date: These regulations are effective on February 24,
2009.
Applicability date: Except as provided in Sec. Sec. 1.401(k)-
3(j)(1)(i) and 1.401(m)-2(a)(6)(ii), the final regulations relating to
qualified automatic contribution arrangements (Sec. Sec. 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 eligible
automatic contribution arrangements (Sec. Sec. 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 FURTHER INFORMATION CONTACT: R. Lisa Mojiri-Azad, Dana Barry, or
William D. Gibbs at (202) 622-6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-2135 .
The collection of information in these final regulations is in
Sec. Sec. 1.401(k)-3 and 1.414(w)-1. The information in Sec.
1.401(k)-3 is required to comply with the statutory notice requirements
in sections 401(k)(13) and 401(m)(12), and is expected to be included
in the notices currently provided to employees that inform them of
their rights and benefits under the plan. The collection of information
under Sec. 1.414(w)-1 is required to comply with the statutory notice
requirements of section 414(w) and is expected to be included in the
notices currently provided to employees
[[Page 8201]]
that inform them of their rights and benefits under the plan.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to regulations under sections
401(k), 401(m), 402(c), 411(a), and 4979 of the Internal Revenue Code
(Code) and new regulations under section 414(w) in order to reflect
certain of the provisions of section 902 of the Pension Protection Act
of 2006, Public Law 109-280 (PPA `06), taking into account certain of
the changes made by section 109(b) of the Worker, Retiree, and Employer
Recovery Act of 2008, Public Law 110-458 (WRERA).
Section 902 of PPA `06 added sections 401(k)(13), 401(m)(12), and
414(w) to the Code to facilitate automatic contribution arrangements
(sometimes referred to as automatic enrollment) in qualified cash or
deferred arrangements under section 401(k), as well as in similar
arrangements under sections 403(b) and 457(b). An automatic
contribution arrangement is a cash or deferred arrangement that
provides that, in the absence of an affirmative election by an eligible
employee, a default election applies under which the employee is
treated as having made an election to have a specified contribution
made on his or her behalf under the plan.
Section 401(k)(1) provides that a profit-sharing, stock bonus, pre-
ERISA money purchase, or rural cooperative plan will not fail to
qualify under section 401(a) merely because it contains a qualified
cash or deferred arrangement. Section 1.401(k)-1(a)(2) defines a cash
or deferred arrangement (CODA) as an arrangement under which an
eligible employee may make a cash or deferred election with respect to
contributions to, or accruals or other benefits under, a plan that is
intended to satisfy the requirements of section 401(a). Section
1.401(k)-1(a)(3)(i) defines a cash or deferred election as any direct
or indirect election (or modification of an earlier election) by an
employee to have the employer either: (1) Provide an amount to the
employee in the form of cash (or some other taxable benefit) that is
not currently available; or (2) contribute an amount to a trust, or
provide an accrual or other benefit, under a plan deferring the receipt
of compensation. For purposes of determining whether an election is a
cash or deferred election, Sec. 1.401(k)-1(a)(3)(ii) provides that it
is irrelevant whether the default that applies in the absence of an
affirmative election is cash (or some other taxable benefit) or a
contribution, an accrual, or other benefit under a plan deferring the
receipt of compensation. Contributions that are made pursuant to a cash
or deferred election under a qualified CODA are commonly referred to as
elective contributions.
In order for a CODA to be a qualified CODA, it must satisfy a
number of other requirements. Section 401(k)(2)(A) provides that the
amount that each eligible employee under the arrangement may defer as
an elective contribution must be available to the employee in cash.
Section 1.401(k)-1(e)(2)(ii) provides that, in order for a CODA to
satisfy this requirement, the arrangement must provide each eligible
employee with an effective opportunity to make (or change) a cash or
deferred election at least once during each plan year.
Section 401(k)(2)(B) provides that a qualified CODA must provide
that elective contributions may only be distributed after certain
events, including hardship and severance from employment. Similar
distribution restrictions apply under sections 403(b)(7) and
403(b)(11). Section 457(d)(1)(A) includes distribution restrictions for
eligible governmental deferred compensation plans.
Section 401(k)(3)(A)(ii) applies a special nondiscrimination test
to the elective contributions of highly compensated employees, within
the meaning of section 414(q) (HCEs). Under this test, called the
actual deferral percentage (ADP) test, the average percentage of
compensation deferred for HCEs is compared annually to the average
percentage of compensation deferred for nonhighly compensated employees
(NHCEs) eligible under the plan, and if certain limits are exceeded by
the HCEs, corrective action must be taken. Pursuant to section
401(k)(8), one method of correction is distribution to HCEs of excess
contributions made on their behalf.
Section 401(m) provides a parallel test for matching contributions
and employee after-tax contributions under a defined contribution plan,
called the actual contribution percentage (ACP) test. Pursuant to
section 401(m)(6), one method of correction of the ACP test is
distribution to HCEs of excess aggregate contributions made on their
behalf.
Sections 401(k)(12) and 401(m)(11) provide a design-based safe
harbor under which elective contributions under a CODA and any
associated matching contributions are treated as satisfying the ADP and
ACP tests if the arrangement meets certain contribution and notice
requirements. Sections 1.401(k)-3 and 1.401(m)-3 provide guidance on
the requirements for this design-based safe harbor.
Sections 401(k)(13) and 401(m)(12), added by PPA '06 and effective
for plan years beginning on or after January 1, 2008, provide an
alternative design-based safe harbor for a CODA that provides for
automatic contributions at a specified level and meets certain employer
contribution, notice, and other requirements. A CODA that satisfies
these requirements, referred to as a qualified automatic contribution
arrangement (QACA), is treated as satisfying the ADP test and ACP test
with respect to matching contributions.
Section 414(w), added to the Code by section 902(d)(1) of PPA '06
and effective for plan years beginning on or after January 1, 2008,
further facilitates automatic enrollment by providing limited relief
from the distribution restrictions under section 401(k)(2)(B),
403(b)(7), 403(b)(11), or 457(d)(1)(A) in the case of an eligible
automatic contribution arrangement (EACA).
Sections 414(w)(1) and 414(w)(2) provide that an applicable
employer plan that contains an EACA is permitted to allow employees to
elect to receive a distribution equal to the amount of default elective
contributions (and attributable earnings) made with respect to the
employee beginning with the first payroll period to which the EACA
applies to the employee and ending with the effective date of the
election. The election must be made within 90 days after the date of
the first default elective contribution with respect to the employee
under the arrangement. Sections 414(w)(1)(A) and 414(w)(1)(B) provide
that the amount of the distribution is includible in gross income for
the taxable year in which the distribution is made, but is not subject
to the additional income tax under section 72(t).
Section 414(w)(3) defines an EACA as an arrangement under which:
(1) A participant may elect to have the employer make payments as
contributions under the plan on behalf of the participant, or to the
participant directly in cash; (2) the participant is treated as having
elected to have the employer make such contributions in an
[[Page 8202]]
amount equal to a uniform percentage of compensation provided under the
plan until the participant specifically elects not to have such
contributions made (or specifically elects to have such contributions
made at a different percentage); and (3) participants are provided a
notice that satisfies the requirements of section 414(w)(4). Section
109(b)(4) of WRERA eliminated the provision previously found under
section 414(w)(3)(C) that, in the absence of an investment election by
the participant, default elective contributions must be invested in
accordance with the regulations prescribed by the Secretary of Labor
under section 404(c)(5) of the Employee Retirement Income Security Act
of 1974 (ERISA).
Section 414(w)(4) requires that, within a reasonable period before
each plan year, each employee to whom the arrangement applies for such
year receive written notice of the employee's rights and obligations
under the arrangement which is sufficiently accurate and comprehensive
to apprise the employee of such rights and obligations. Section
414(w)(4)(A)(ii) requires that the notice be written in a manner
calculated to be understood by the average employee to whom the
arrangement applies. Section 414(w)(4)(B) provides that the notice must
explain: (1) The employee's rights under the arrangement to elect not
to have elective contributions made on the employee's behalf or to
elect to have contributions made at a different percentage; and (2) how
contributions made under the automatic contribution arrangement will be
invested in the absence of any investment decision by the employee. In
addition, the employee must be given a reasonable period of time after
receipt of the notice and before the first elective contribution is
made to make an election with respect to contributions. In many
respects, the notice under section 414(w)(4) is the same as the notice
required under section 401(k)(13) for a QACA.
Section 414(w)(5), as amended by section 109(b)(5) of WRERA,
defines an applicable employer plan as a trust described in section
401(a) that is exempt from tax under section 501(a), a plan described
in section 403(b), a section 457(b) plan that is maintained by a
governmental employer described in section 457(e)(1)(A), a simplified
employee pension the terms of which provide for a salary reduction
arrangement described in section 408(k)(6), or a SIMPLE described in
section 408(p).
Section 414(w)(6) provides that a withdrawal described in section
414(w)(1) is not to be taken into account for purposes of the ADP test.
Section 109(b)(6) of WRERA amended section 414(w)(6) to provide that a
withdrawal described in section 414(w)(1) is not to be taken into
account for purposes of applying the limitation under section
402(g)(1).
Section 411(a)(3)(G), as amended by section 902(d)(2) of PPA '06,
provides that a matching contribution shall not be treated as
forfeitable merely because the matching contribution is forfeitable if
it relates to a contribution that is withdrawn under an automatic
contribution arrangement that satisfies the requirements of section
414(w).
Section 4979 provides for an excise tax on excess contributions
(within the meaning of section 401(k)(8)(B)) and excess aggregate
contributions (within the meaning of section 401(m)(6)(B)) not
distributed within 2\1/2\ months after the close of the plan year for
which the contributions are made. Section 902 of PPA '06 amended
section 4979 to lengthen this 2\1/2\ month correction period for excess
contributions and excess aggregate contributions under an EACA to 6
months. Thus, in the case of an EACA that is part of a section 401(k)
plan, the section 4979 excise tax does not apply to any excess
contributions or excess aggregate contributions which, together with
income allocable to the contributions, are distributed or forfeited (if
forfeitable) within 6 months after the close of the plan year.
Section 902 of PPA '06 amended section 4979(f)(2) to provide that
any distributions of excess contributions and excess aggregate
contributions (whether or not under an EACA) are includible in the
employee's gross income for the taxable year in which distributed.
However, pursuant to sections 401(k)(8)(D) and 401(m)(7)(A), the
distributions are not subject to the additional income tax under
section 72(t). Section 902 of PPA '06 also amended sections 401(k)(8),
401(m)(6), and 4979(f)(1) to eliminate the requirement that
distributions of excess contributions or excess aggregate contributions
(whether or not under an EACA) include income allocable to the period
after the end of the plan year (gap period income).
On November 8, 2007, proposed regulations under sections 401(k),
401(m), 402(c), 411(a), 414(w), and 4979(f) relating to automatic
contribution arrangements were issued (72 FR 63144). Written public
comments were received on the proposed regulations, and a public
hearing was held on May 19, 2008. After consideration of the comments,
these final regulations adopt the provisions of the proposed
regulations with certain modifications, the most significant of which
are highlighted in the Summary of Comments and Explanation of
Revisions. In addition, these final regulations reflect the amendments
to sections 401(k)(13) and 414(w) that were made by WRERA.
Summary of Comments and Explanation of Revisions
I. Qualified Automatic Contribution Arrangement Under Section
401(k)(13)
A. Minimum Percentage Requirement
Section 401(k)(13)(C)(iii) sets forth a series of minimum default
contribution percentages that an automatic contribution arrangement
must satisfy in order to be a qualified automatic contribution
arrangement (QACA). 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.
Several commentators requested guidance on the application of the
minimum percentage requirement in the case of a rehired employee. The
final regulations provide that 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. However,
in response to recordkeeping concerns raised by commentators, the final
regulations also provide that a plan is permitted to treat an employee
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.
Other commentators asked whether plans are permitted to limit the
duration of an affirmative election or to require
[[Page 8203]]
employees to make new elections. Under the final regulations, automatic
enrollment applies for periods during which the affirmative election is
not in effect. Accordingly, 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.
Similarly, if an employee who made an affirmative election takes a
hardship withdrawal under the plan and the plan suspends elective
contributions for 6 months after receipt of the hardship distribution
in accordance with Sec. 1.401(k)-3(c)(6)(v)(B), then, if the plan does
not reinstate the affirmative election at the end of the 6 months, the
employer must automatically enroll the employee.
The final regulations provide that, for plan years beginning on or
after January 1, 2010, compensation for purposes of determining default
contributions means safe harbor compensation as defined in Sec.
1.401(k)-3(b)(2).
B. Uniformity Requirement
Section 401(k)(13)(C)(iii) provides that the default percentage
must be applied uniformly. The proposed regulations provided that a
plan does not fail to satisfy this uniformity requirement merely
because: the percentage varies based on the number of years an eligible
employee has participated in the automatic contribution arrangement
intended to be a QACA; the rate of elective contributions under a cash
or deferred election that is 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 Sec. 1.401(k)-3(c)(6)(v)(B).
Some commentators asked whether a QACA may provide for an increase
in the default percentage in the middle of the plan year. These
commentators suggested that some employers wanted to provide for such
an increase to coincide with salary increases or performance
evaluations.
To address this issue, the final regulations expand the exception
to the uniformity requirement that allows variance based on the number
of years since the date the employee first had contributions made
pursuant to a default election under an arrangement that is intended to
be a QACA. Under the final regulations, the default percentage may also
vary based on the portions of years since that date. Thus, the plan may
provide for the 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
The proposed regulations provided that a QACA satisfies the notice
requirement of section 401(k)(13)(E) only if the notice satisfies the
notice requirements under section 401(k)(12) and satisfies the
additional requirements found in section 401(k)(13)(E)(ii). Section
401(k)(12)(D) and section 401(k)(13)(E)(i) provide that the notice must
be provided within a reasonable period before each plan year to each
employee eligible to participate in the QACA.
The final regulations under section 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.
The proposed regulations under section 401(k)(13) applied these
same rules to the notice required under section 401(k)(13)(E)(i). In
accordance with section 401(k)(13)(E)(ii), the proposed regulations
also provided that the notice satisfies the timing requirements only if
it is provided sufficiently early so that the employee has a reasonable
period of time after receipt of the notice and before the first
contribution is made pursuant to a default election under the
arrangement to make an affirmative election to defer a different amount
or percentage.
Some commentators raised a concern about meeting the notice
requirement for employees who are eligible to participate in the plan
immediately upon hire. Commentators suggested that employers be given a
grace period to provide notice, such as 15 days after hire, as long as
the employee has an effective opportunity to elect not to make
contributions or make an affirmative election to defer a different
amount or percentage of compensation prior to the first contribution
made pursuant to a default election.
The final regulations modify the deemed satisfaction of timing
requirement set forth in Sec. 1.401(k)-3(d)(3)(ii). The regulations
provide 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. 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).
The final regulations provide rules for when the default election
must first become effective. In accordance with section
401(k)(13)(E)(ii)(III), the final regulations provide that 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
[[Page 8204]]
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
The proposed regulations provided that an automatic contribution
arrangement does not fail to be a QACA merely because the default
election is not applied to an employee who was eligible under the cash
or deferred arrangement (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) to have
elective contributions made on his or her behalf (in a specified amount
or percentage of compensation) or not have elective contributions made
on his or her behalf.
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. These commentators stated that it would be administratively
difficult to determine which employees had affirmative elections in
effect prior to the effective date of the QACA.
The regulations do not expand the exception for automatically
enrolling current employees to employees who have not made an
affirmative election. Under section 401(k)(13)(C)(iv)(II), only those
employees who had an affirmative election in effect immediately before
the QACA became effective are permitted to be excluded from having a
default election apply to them.
E. Other Topics
Commentators requested clarification as to whether the safe harbor
nonelective and matching contributions made under a QACA are eligible
for hardship withdrawal. The final regulations clarify that these safe
harbor contributions are subject to the withdrawal restrictions found
in Sec. 1.401(k)-1(d) that apply to QNECs and QMACs. Thus, the maximum
distributable amount under Sec. 1.401(k)-1(d)(3)(ii) does not include
earnings, QNECs, QMACs, or these safe harbor contributions.
A commentator asked whether safe harbor matching or nonelective
contributions were required for all employees, including those eligible
employees with affirmative elections in effect. 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.
II. Eligible Automatic Contribution Arrangement Under Section 414(w)
A. Non-Universal Eligible Automatic Contribution Arrangements
The proposed regulations provided that an eligible automatic
contribution arrangement (EACA) is an automatic contribution
arrangement under an applicable employer plan that applies to each
``eligible employee.'' An eligible employee was defined as an employee
who is eligible to make a cash or deferred election under the plan.
Therefore, under the proposed regulations, an employer was required to
apply automatic enrollment to all current and new employees eligible to
make a deferral election under the applicable plan who did not have an
affirmative election in effect.
Commentators requested flexibility in the implementation of an EACA
by permitting an employer to apply automatic enrollment only to those
employees who are hired on or after the effective date of the EACA.
The final regulations modify the rule in the proposed regulations
to provide that the employees who must be subject to the automatic
enrollment provisions under an EACA are only those employees who are
specified in the plan as being covered employees under the EACA. Thus,
automatic enrollment under an EACA need not apply to all employees
eligible to make a deferral election under the applicable plan, but
only to those employees who are covered by the EACA.
The final regulations provide that the plan document must specify
the employees who are covered under the EACA and must state whether an
employee who makes an affirmative election remains covered under the
EACA. Under section 414(w)(4), the notice regarding an employee's
rights and obligations under the arrangement need only be provided to
those employees who are covered employees under the EACA as set forth
in the plan. Thus, if a plan provides that an employee who makes an
affirmative election is no longer a covered employee under the EACA,
then the employee is not required to receive the notice after he or she
makes an affirmative election.
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
6-month period for correcting excess contributions and excess aggregate
contributions without incurring an excise tax under section 4979, only
if all eligible NHCEs and eligible HCEs are covered employees under the
EACA for the entire plan year (or the portion of the plan year that the
employees are eligible employees). Thus, if an EACA covers fewer than
all the eligible employees under the plan, the employer will be unable
to take advantage of the extension under section 4979.
B. Uniformity Requirement
The proposed regulations provided that an EACA must provide that
the default elective contribution is a uniform percentage of
compensation. The exceptions to the uniformity requirement for a QACA
set forth in Sec. 1.401(k)-3(j)(2)(iii) also applied to an EACA
(without regard to whether the arrangement was intended to be a QACA).
Some commentators requested that the uniformity requirement 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. The
final regulations do not specifically permit this. However, these plan
sponsors can accomplish a similar goal by establishing separate EACAs
for each of these separate groups. To address the possibility that a
plan may contain more than one EACA, the final regulations provide that
the requirement that the default elective contributions under an EACA
be a uniform percentage of compensation is applied by aggregating all
automatic contribution arrangements within the plan that are intended
to be EACAs. For this purpose, in the case of a plan subject to section
410(b), the definition of plan is determined after applying the
disaggregation rules of Sec. 1.401(k)-1(b)(4). Thus, a plan that is
subject to the rules of section 410(b) is permitted to provide for
separate EACAs for different groups of collectively bargained employees
or different employers in a multiple employer plan with a different
default percentage for each EACA, but such a plan could not have
different default percentages apply to different groups of employees
that are in the same plan after application of the disaggregation rules
of Sec. 1.401(k)-1(b)(4).
[[Page 8205]]
C. Mid-Year Implementation of an Eligible Automatic Contribution
Arrangement
Section 401(k)(12)(D) contains the notice requirement applicable to
a plan that is relying on the safe harbor for nondiscrimination testing
in section 401(k)(12). It requires that the notice be provided ``within
a reasonable period before any year.'' The final regulations under
section 401(k)(12) provide that the notice must be provided within a
reasonable period of time before the plan year (or, in the first year
that the employee becomes eligible, within a reasonable period of time
before the employee becomes eligible). The final regulations further
provide that whether this timing requirement is satisfied is based upon
all of the relevant facts and circumstances and that the timing
requirement is deemed to be satisfied if the notice is given at least
30 days (and no more than 90 days) before the beginning of each plan
year. In the case of an employee who 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 for the cash or deferred
arrangement (and no later than the date the employee becomes eligible).
Section 401(k)(13)(E), which contains the notice requirements
applicable to a QACA, and section 414(w)(4), which contains the notice
requirements applicable to an EACA, each require that the notice be
provided ``within a reasonable period before each plan year.'' The
proposed regulations interpreted these provisions in a manner
consistent with the interpretation in the final regulations under
section 401(k)(12) of the almost identical language in that section,
including the requirement that the notice be provided within a
reasonable period of time before each plan year, except that, for
individuals who become eligible employees during the plan year, the
notice need only be provided within a reasonable period before the
employee becomes an eligible employee.
Some commentators noted that the notice timing requirement could be
interpreted to preclude the establishment of an EACA in the middle of
the plan year, in situations where the notice was not provided before
the beginning of the plan year. They suggested that the statutory
requirement to provide notice before the start of each plan year should
not preclude starting an EACA in the middle of the plan year of an
existing cash or deferred arrangement that is not an EACA, if notice is
provided to each eligible employee within a reasonable period of time
before the employee becomes eligible for the arrangement.
The final regulations do not adopt this suggestion. Instead, the
final regulations generally retain the rule in the proposed
regulations, which is consistent with the statutory requirements of
section 414(w)(4) and with the interpretation of the identical language
in section 401(k)(13) and the almost identical language in section
401(k)(12). The final regulations do, however, treat individuals who
first become covered under an automatic contribution arrangement as a
result of a change in employment status the same as individuals who
first become eligible to make a cash or deferred election for purposes
of the notice timing requirements.
Consistent with the revisions to the deemed timing rule for
purposes of sections 401(k)(12) and 401(k)(13) described in this
preamble, the final regulations provide 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. 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.
D. Permissible Withdrawal
Section 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 proposed
regulations provided that the date of the first default elective
contribution is the date that the compensation that is subject to the
cash or deferred election would otherwise have been included in gross
income.
Some commentators suggested that the 90-day period start from the
date the first contribution is received by the plan for the
participant. The final regulations retain the rule in the proposed
regulations that the 90-day period starts after the date the
compensation 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.
If an employer is concerned about inadvertently permitting
withdrawal elections outside 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. Under the final
regulations, 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.
The final regulations also provide that the date of the first
default elective contribution must take into account any default
elective contributions made under any EACA under the plan. For this
purpose, all EACAs under the plan must be aggregated. However, if 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), then there is no
requirement to aggregate those different EACAs. 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. In
addition, in response to comments, 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.
Commentators asked whether employers can restrict the permissible
withdrawals based on subsequent affirmative elections made by
employees. For example, one commentator requested that an employer be
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 section 401(a) plan or a section
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.
[[Page 8206]]
The proposed regulations provided that the effective date of the
permissible withdrawal election must be no later than the last day of
the payroll period that begins after the date the election is made.
This rule was included in the proposed regulations to limit section
414(w) withdrawals to default elective contributions made for short
periods of time. In response to comments, the final regulations modify
this rule to provide that the latest effective date of the permissible
withdrawal election cannot be after the earlier of: (1) The pay date
for the second payroll period beginning after the election is made, or
(2) 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.
Commentators also requested that the IRS clarify when the
permissible withdrawal amount must 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.
The proposed regulations provided that a permissible withdrawal
distribution may be reduced by any generally applicable fees, but
specified that the plan may not charge a different fee for a
distribution under section 414(w) than would apply to other
distributions. In response to comments, 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.
One commentator requested guidance with respect to the withholding
treatment of permissible withdrawal amounts. These amounts are subject
to section 3405(a).
E. Forfeiture of Employer Matching Contributions
The proposed regulations provided that matching contributions with
respect to default elective contributions that had been distributed
pursuant to a permissible withdrawal election must be forfeited. In
response to comments, 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. The final
regulations provide that the plan is permitted to provide that matching
contributions will not be made with respect to any withdrawal made
under Sec. 1.414(w)-1(c) if the withdrawal has been made prior to the
date as of which the matching contributions would otherwise be
allocated.
III. Other Issues
A. Other Automatic Contribution Arrangements
Many employers have previously adopted automatic contribution
arrangements as originally described in prior guidance, such as Rev.
Rul. 2000-8, 2000-1 CB 617. 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. These final
regulations do not affect any automatic contribution arrangement that
is not intended to be a QACA or an EACA.
B. Other Issues Under Section 902 of PPA '06 and WRERA
These regulations also reflect the modification to the correction
rules for excess contributions and excess aggregate contributions
provided in section 902(e) of PPA'06. These provisions include: (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. However, 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 Sec. Sec. 1.401(k)-3(j)(1)(i) and 1.401(m)-
2(a)(6)(ii), the final regulations relating to qualified automatic
contribution arrangements (Sec. Sec. 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 eligible automatic contribution
arrangements (Sec. Sec. 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
Sec. 1.414(w)-1 or these final regulations will be treated as
operating in accordance with a good faith interpretation of section
414(w).
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has been
determined that 5 U.S.C. 533(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information in these final regulations
will not have a significant economic impact on a substantial number of
small entities. This certification is based on the fact that most small
entities that maintain plans that will be eligible for the safe harbor
provisions of sections 401(k) and 401(m) or the distribution relief
provisions of section 414(w) currently provide a similar notice with
which this notice can be combined. Therefore, an analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of
proposed rulemaking preceding this regulation was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comments on its impact on small business.
Drafting Information
The principal authors of these regulations are Dana Barry, William
D. Gibbs, and R. Lisa Mojiri-Azad, Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and Treasury Department participated in the
development of these regulations.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 54
Excise taxes, Pensions, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 54 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended to read as
follows:
[[Page 8207]]
Authority: 26 U.S.C. 401(m)(9) and 26 U.S.C. 7805 * * * Section
1.401(k)-3 is also issued under 26 U.S.C. 401(m)(9).
0
Par. 2. Section 1.401(k)-0 is amended in:
0
1. The entry for Sec. 1.401(k)-2 is amended by--
0
a. Adding the entry for Sec. 1.401(k)-2(a)(5)(vi) and revising the
entry for Sec. 1.401(k)-2(b)(2)(iv)(D).
0
b. Revising entries for Sec. 1.401(k)-2(b)(2)(vi)(A) and
(b)(2)(vi)(B).
0
c. Adding an entry for Sec. 1.401(k)-2(b)(5)(iii).
0
2. The entry for Sec. 1.401(k)-3 is amended by--
0
a. Adding entries for Sec. Sec. 1.401(k)-3(a)(1), 1.401(k)-3(a)(2) and
1.401(k)-3(a)(3).
0
b. Adding an entry for Sec. 1.401(k)-3(i).
0
c. Adding entries for Sec. Sec. 1.401(k)-3(j)(1) and 1.401(k)-3(j)(2).
0
d. Adding entries for Sec. Sec. 1.401(k)-3(k)(1), 1.401(k)-3(k)(2),
1.401(k)-3(k)(3) and 1.401(k)-3(k)(4).
The additions and revisions read as follows:
Sec. 1.401(k)-0 Table of Contents.
* * * * *
Sec. 1.401(k)-2 ADP test.
(a) * * *
(5) * * *
(vi) Default elective contributions pursuant to section 414(w).
* * * * *
(b) * * *
(2) * * *
(iv) * * *
(A) * * *
* * * * *
(D) Plan years before 2008.
* * * * *
(vi) * * *
(A) Corrective distributions for plan years beginning on or
after January 1, 2008.
(B) Corrective distributions for plan years beginning before
January 1, 2008.
* * * * *
(5) * * *
(iii) Special rule for eligible automatic contribution
arrangements.
* * * * *
Sec. 1.401(k)-3 Safe harbor requirements.
(a) * * *
(1) Section 401(k)(12) safe harbor.
(2) Section 401(k)(13) safe harbor.
(3) Requirements applicable to safe harbor contributions.
* * * * *
(i) [Reserved].
(j) Qualified automatic contribution arrangement.
(1) Automatic contribution requirement.
(i) In general.
(ii) Automatic contribution arrangement.
(iii) Exception to automatic enrollment for certain current
employees.
(2) Qualified percentage.
(i) In general.
(ii) Minimum percentage requirements.
(A) Initial-period requirement.
(B) Second-year requirement.
(C) Third-year requirement.
(D) Later years requirement.
(iii) Exception to uniform percentage requirement.
(iv) Treatment of periods without default contributions.
(k) Modifications to contribution requirements and notice
requirements for automatic contribution safe harbor.
(1) In general.
(2) Lower matching requirement.
(3) Modified nonforfeiture requirement.
(4) Additional notice requirements.
(i) In general.
(ii) Additional information.
(iii) Timing requirements.
0
Par. 3. Section 1.401(k)-1 is amended by:
0
1. Revising paragraph (b)(1)(ii)(C) and adding new paragraph
(b)(1)(ii)(D).
0
2. Adding a new sentence after the fifth sentence in paragraph (e)(7).
The additions and revisions to read as follows:
Sec. 1.401(k)-1 Certain cash or deferred arrangements.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(C) The ADP safe harbor provisions of section 401(k)(13) described
in Sec. 1.401(k)-3; or
(D) The SIMPLE 401(k) provisions of section 401(k)(11) described in
Sec. 1.401(k)-4.
* * * * *
(e) * * *
(7) Plan provision requirement. * * * In addition, a plan that uses
the safe harbor method of section 401(k)(13), as described in paragraph
(b)(1)(ii)(C) of this section, must specify the default percentages
that apply for the plan year and whether the safe harbor contribution
will be the nonelective safe harbor contribution or the matching safe
harbor contribution, and is not permitted to provide that ADP testing
will be used if the requirements for the safe harbor are not satisfied.
* * *
* * * * *
0
Par. 4. Section 1.401(k)-2 is amended by:
0
1. Adding paragraph (a)(5)(vi).
0
2. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
0
3. Removing paragraph (b)(2)(iv)(E).
0
4. Revising paragraph (b)(2)(vi)(A).
0
5. Revising the heading and adding a new first sentence to paragraph
(b)(2)(vi)(B).
0
6. Removing Examples 3, 4, and 5 of paragraph (b)(2)(viii).
0
7. Revising paragraph (b)(4)(iii) and adding paragraph (b)(5)(iii).
The additions and revisions to read as follows:
Sec. 1.401(k)-2 ADP test.
(a) * * *
(5) * * *
(vi) Default elective contributions pursuant to section 414(w).
Default elective contributions made under an eligible automatic
contribution arrangement (within the meaning of Sec. 1.414(w)-1(b))
that are distributed pursuant to Sec. 1.414(w)-1(c) for plan years
beginning on or after January 1, 2008, are not taken into account under
paragraph (a)(4) of this section for the plan year for which the
contributions are made, or for any other plan year.
* * * * *
(b) * * *
(2) * * *
(iv) Income allocable to excess contributions--(A) General rule.
For plan years beginning on or after January 1, 2008, the income
allocable to excess contributions is equal to the allocable gain or
loss through the end of the plan year. See paragraph (b)(2)(iv)(D) of
this section for rules that apply to plan years beginning before
January 1, 2008.
* * * * *
(D) Plan years before 2008. For plan years beginning before January
1, 2008, the income allocable to excess contributions is determined
under Sec. 1.401(k)-2(b)(2)(iv) (as it appeared in the April 1, 2007,
edition of 26 CFR part 1).
* * * * *
(vi) Tax treatment of corrective distributions--(A) Corrective
distributions for plan years beginning on or after January 1, 2008.
Except as provided in this paragraph (b)(2)(vi), for plan years
beginning on or after January 1, 2008, a corrective distribution of
excess contributions (and allocable income) is includible in the
employee's gross income for the employee's taxable year in which
distributed. In addition, the corrective distribution is not subject to
the early distribution tax of section 72(t). See paragraph (b)(5) of
this section for additional rules relating to the employer excise tax
on amounts distributed more than 2\1/2\ months (6 months in the case of
certain plans that include an eligible automatic contribution
arrangement within the meaning of section 414(w)) after the end of the
plan year. See also Sec. 1.402(c)-2, A-4 for restrictions on rolling
over distributions that are excess contributions.
(B) Corrective distributions for plan years beginning before
January 1, 2008. The tax treatment of corrective distributions for plan
years beginning before January 1, 2008, is determined under Sec.
1.401(k)-2(b)(2)(vi) (as it
[[Page 8208]]
appeared in the April 1, 2007, edition of 26 CFR Part 1). * * *
* * * * *
(4) * * *
(iii) Permitted forfeiture of QMAC. Pursuant to section
401(k)(8)(E), a qualified matching contribution is not treated as
forfeitable under Sec. 1.401(k)-1(c) merely because under the plan it
is forfeited in accordance with paragraph (b)(4)(ii) of this section or
Sec. 1.414(w)-1(d)(2).
* * * * *
(5) * * *
(iii) Special rule for eligible automatic contribution
arrangements. In the case of excess contributions under a plan that
includes an eligible automatic contribution arrangement within the
meaning of section 414(w), 6 months is substituted for 2\1/2\ months in
paragraph (b)(5)(i) of this section. The additional time described in
this paragraph (b)(5)(iii) applies to a distribution of excess
contributions for a plan year beginning on or after January 1, 2010
only where all the eligible NHCEs and eligible HCEs are covered
employees under the eligible automatic contribution arrangement (within
the meaning of Sec. 1.414(w)-1(e)(3)) for the entire plan year (or for
the portion of the plan year that the eligible NHCEs and eligible HCEs
are eligible employees).
* * * * *
0
Par. 5. Section 1.401(k)-3 is amended by:
0
1. Revising paragraph (a).
0
2. Adding a new sentence at the end of paragraph (d)(3)(ii).
0
3. Revising the first sentence of paragraph (e)(1).
0
4. Revising the last sentence of paragraph (h)(2).
0
5. Revising the first sentence of paragraph (h)(3).
0
6. Adding paragraphs (i), (j), and (k).
The additions and revisions to read as follows:
Sec. 1.401(k)-3 Safe harbor requirements.
(a) ADP test safe harbor--(1) Section 401(k)(12) safe harbor. A
cash or deferred arrangement satisfies the ADP safe harbor provision of
section 401(k)(12) for a plan year if the arrangement satisfies the
safe harbor contribution requirement of paragraph (b) or (c) of this
section for the plan year, the notice requirement of paragraph (d) of
this section, the plan year requirements of paragraph (e) of this
section, and the additional rules of paragraphs (f), (g), and (h) of
this section, as applicable.
(2) Section 401(k)(13) safe harbor. For plan years beginning on or
after January 1, 2008, a cash or deferred arrangement satisfies the ADP
safe harbor provision of section 401(k)(13) for a plan year if the
arrangement is described in paragraph (j) of this section and satisfies
the safe harbor contribution requirement of paragraph (k) of this
section for the plan year, the notice requirement of paragraph (d) of
this section (modified to include the information set forth in
paragraph (k)(4) of this section), the plan year requirements of
paragraph (e) of this section, and the additional rules of paragraphs
(f), (g), and (h) of this section, as applicable. A cash or deferred
arrangement that satisfies the requirements of this paragraph (a)(2) is
referred to as a qualified automatic contribution arrangement.
(3) Requirements applicable to safe harbor contributions. Pursuant
to section 401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), the safe
harbor contribution requirement of paragraph (b), (c), or (k) of this
section must be satisfied without regard to section 401(l). The
contributions made under paragraph (b) or (c) of this section (and the
corresponding contributions under paragraph (k) of this section) are
referred to as safe harbor nonelective contributions and safe harbor
matching contributions.
* * * * *
(d) * * *
(3) * * *
(ii) Deemed satisfaction of timing requirement. * * * 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 the date the employee becomes
eligible.
(e) Plan year requirement--(1) General rule. Except as provided in
this paragraph (e) or in paragraph (f) of this section, a plan will
fail to satisfy the requirements of sections 401(k)(12), 401(k)(13),
and this section unless plan provisions that satisfy the rules of this
section are adopted before the first day of the plan year and remain in
effect for an entire 12-month plan year. * * *
* * * * *
(h) * * *
(2) Use of safe harbor nonelective contributions to satisfy other
discrimination tests. * * * However, pursuant to section
401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), to the extent they are
needed to satisfy the safe harbor contribution requirement of paragraph
(b) of this section, safe harbor nonelective contributions may not be
taken into account under any plan for purposes of section 401(l)
(including the imputation of permitted disparity under Sec.
1.401(a)(4)-7).
(3) Early participation rules. Section 401(k)(3)(F) and Sec.
1.401(k)-2(a)(1)(iii)(A), which provide an alternative
nondiscrimination rule for certain plans that provide for early
participation, do not apply for purposes of section 401(k)(12), section
401(k)(13), and this section. * * *
* * * * *
(i) [Reserved].
(j) Qualified automatic contribution arrangement--(1) Automatic
contribution requirement--(i) In general. A cash or deferred
arrangement is described in this paragraph (j) if it is an automatic
contribution arrangement described in paragraph (j)(1)(ii) of this
section where the default election under that arrangement is a
contribution equal to the qualified percentage described in paragraph
(j)(2) of this section multiplied by the eligible employee's
compensation from which elective contributions are permitted to be made
under the cash or deferred arrangement. For plan years beginning on or
after January 1, 2010, the compensation used for this purpose must be
safe harbor compensation as defined under paragraph (b)(2) of this
section.
(ii) Automatic contribution arrangement. An automatic contribution
arrangement is a cash or deferred arrangement within the meaning of
Sec. 1.401(k)-1(a)(2) that provides that, in the absence of an
eligible employee's affirmative election, a default election applies
under which the employee is treated as having made an election to have
a specified contribution made on his or her behalf under the plan. The
default election begins to apply with respect to an eligible employee
no earlier than a reasonable period of time after receipt of the notice
describing the automatic contribution arrangement. The default election
ceases to apply with respect to an eligible employee for periods of
time with respect to which the employee has an affirmative election
that is currently in effect to--
(A) Have elective contributions made in a different amount on his
or her behalf (in a specified amount or percentage of compensation); or
(B) Not have any elective contributions made on his or her behalf.
(iii) Exception to automatic enrollment for certain current
employees. An automatic contribution arrangement will not fail to be a
qualified automatic contribution arrangement merely because the default
[[Page 8209]]
election provided under paragraph (j)(1)(i) of this section is not
applied to an employee who was an eligible employee under the cash or
deferred arrangement (or a predecessor arrangement) immediately prior
to the effective date of the qualified automatic contribution
arrangement and on that effective date had an affirmative election in
effect (that remains in effect) to--
(A) Have elective contributions made on his or her behalf (in a
specified amount or percentage of compensation); or
(B) Not have elective contributions made on his or her behalf.
(2) Qualified percentage--(i) In general. A percentage is a
qualified percentage only if it--
(A) Is uniform for all employees (except to the extent provided in
paragraph (j)(2)(iii) of this section);
(B) Does not exceed 10 percent; and
(C) Satisfies the minimum percentage requirements of paragraph
(j)(2)(ii) of this section.
(ii) Minimum percentage requirements--(A) Initial-period
requirement. The minimum percentage requirement of this paragraph
(j)(2)(ii)(A) is satisfied only if the percentage that applies for the
initial period is at least 3 percent. For this purpose, the initial
period begins when the employee first has contributions made pursuant
to a default election under an arrangement that is intended to be a
qualified automatic contribution arrangement for a plan year and ends
on the last day of the following plan year.
(B) Second-year requirement. The minimum percentage requirement of
this paragraph (j)(2)(ii)(B) is satisfied only if the percentage that
applies for the plan year immediately following the last day described
in paragraph (j)(2)(ii)(A) of this section is at least 4 percent.
(C) Third-year requirement. The minimum percentage requirement of
this paragraph (j)(2)(ii)(C) is satisfied only if the percentage that
applies for the plan year immediately following the plan year described
in paragraph (j)(2)(ii)(B) of this section is at least 5 percent.
(D) Later years requirement. A percentage satisfies the minimum
percentage requirement of this paragraph (j)(2)(ii)(D) only if the
percentage that applies for all plan years following the plan year
described in paragraph (j)(2)(ii)(C) of this section is at least 6
percent.
(iii) Exception to uniform percentage requirement. A plan does not
fail to satisfy the uniform percentage requirement of paragraph
(j)(2)(i)(A) of this section merely because--
(A) The percentage varies based on the number of years (or portions
of years) since the beginning of the initial period for an eligible
employee;
(B) The rate of elective contributions under a cash or deferred
election that is in effect for an employee immediately prior to the
effective date of the default percentage under the qualified automatic
contribution arrangement is not reduced;
(C) 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
(D) The default election provided under paragraph (j)(1)(i) of this
section 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 Sec. 1.401(k)-3(c)(6)(v)(B).
(iv) Treatment of periods without default contributions. The
minimum percentages described in paragraph (j)(2)(ii) of this section
are based on the date the initial period begins, regardless of whether
the employee is eligible to make elective contributions under the plan
after that date. Thus, for example, if an employee is ineligible to
make contributions under the plan for 6 months because the employee had
a hardship withdrawal and the 6-month period includes a date as of
which the default minimum percentage is increased, then the default
percentage must reflect that increase when the employee is permitted to
resume contributions. However, for purposes of determining the date the
initial period described in paragraph (j)(2)(ii)(A) of this section
begins, a plan is permitted to treat an employee who for an entire plan
year did not have contributions made pursuant to a default election
under the qualified automatic contribution arrangement as if the
employee had not had such contributions made for any prior plan year as
well.
(k) Modifications to contribution requirements and notice
requirements for automatic contribution safe harbor--(1) In general. A
cash or deferred arrangement satisfies the contribution requirements of
this paragraph (k) only if it satisfies the contribution requirements
of either paragraph (b) or (c) of this section, as modified by the
rules of paragraphs (k)(2) and (k)(3) of this section. In addition, a
cash or deferred arrangement satisfies the notice requirement of
section 401(k)(13)(E) only if the notice satisfies the additional
requirements of paragraph (k)(4) of this section.
(2) Lower matching requirement. In applying the requirement of
paragraph (c) of this section in the case of a cash or deferred
arrangement, the basic matching formula is modified so that each
eligible NHCE must receive the sum of--
(i) 100 percent of the employee's elective contributions that do
not exceed 1 percent of the employee's safe harbor compensation; and
(ii) 50 percent of the employee's elective contributions that
exceed 1 percent of the employee's safe harbor compensation but that do
not exceed 6 percent of the employee's safe harbor compensation.
(3) Modified nonforfeiture requirement. A cash or deferred
arrangement described in paragraph (j) of this section will not fail to
satisfy the requirements of paragraph (b) or (c) of this section, as
applicable, merely because the safe harbor contributions are not
qualified nonelective contributions or qualified matching contributions
provided that--
(i) The contributions are subject to the withdrawal restrictions
that apply to QNECs and QMACs, as set forth in Sec. 1.401(k)-1(d); and
(ii) Any employee who has completed 2 years of service (within the
meaning of section 411(a)) has a nonforfeitable right to the account
balance attributable to the safe harbor contributions.
(4) Additional notice requirements--(i) In general. A notice
satisfies the requirements of this paragraph (k)(4) only if it includes
the additional information described in paragraph (k)(4)(ii) of this
section and satisfies the timing requirements of paragraph (k)(4)(iii)
of this section.
(ii) Additional information. A notice satisfies the additional
information requirement of this paragraph (k)(4)(ii) only if it
explains--
(A) The level of elective contributions which will be made on the
employee's behalf if the employee does not make an affirmative
election;
(B) The employee's right under the arrangement to elect not to have
elective contributions made on the employee's behalf (or to elect to
have such contributions made in a different amount or percentage of
compensation); and
(C) How contributions under the arrangement will be invested
(including, in the case of an arrangement under which the employee may
elect among 2 or more investment options, how contributions will be
invested in the absence of an investment election by the employee).
[[Page 8210]]
(iii) Timing requirements. A notice satisfies the timing
requirements of this paragraph (k)(4)(iii) only if it is provided
sufficiently early so that the employee has a reasonable period of time
after receipt of the notice to make the elections described under
paragraph (k)(4)(ii)(B) and (C) of this section. However, the
requirement in the preceding sentence that an employee have a
reasonable period of time after receipt of the notice to make an
alternative election does not permit a plan to make the default
election effective any later than the earlier of--
(A) The pay date for the second payroll period that begins after
the date the notice is provided; and
(B) The first pay date that occurs at least 30 days after the
notice is provided.
0
Par. 6. Section 1.401(k)-6 is amended by revising the last sentence in
the definition of ``qualified matching contributions (QMACs)'' to read
as follows:
Sec. 1.401(k)-6 Definitions.
* * * * *
Qualified matching contributions (QMACs). * * * See also Sec.
1.401(k)-2(b)(4)(iii) for a rule providing that a matching contribution
does not fail to qualify as a QMAC solely because it is forfeitable
under section 411(a)(3)(G) as a result of being a matching contribution
with respect to an excess deferral, excess contribution, or excess
aggregate contribution, or it is forfeitable under Sec. 1.414(w)-
1(d)(2).
* * * * *
0
Par. 7. Section 1.401(m)-0 is amended in:
0
1. The entry for Sec. 1.401(m)-2 by--
0
a. Revising Sec. 1.401(m)-2(b)(2)(iv)(D).
0
b. Adding an entry for Sec. 1.401(m)-2(b)(4)(iii).
0
c. Revising the entries for Sec. 1.401(m)-2(b)(2)(vi)(A) and
(b)(2)(vi)(B).
0
d. Adding an entry for Sec. 1.401(m)-2(b)(4)(iii).
0
2. The entry for Sec. 1.401(m)-3 by revising the entries for
Sec. Sec. 1.401(m)-3(a)(1), 1.401(m)-3(a)(2) and 1.401(m)-3(a)(3).
The additions and revisions read as follows:
Sec. 1.401(m)-0 Table of Contents.
* * * * *
Sec. 1.401(m)-2 ACP Test.
* * * * *
(b) * * *
(2) * * *
(iv) * * *
(A) * * *
* * * * *
(D) Plan years before 2008.
(E) Allocable income for recharacterized elective contributions.
* * * * *
(vi) * * *
(A) Corrective distributions for plan years beginning on or
after January 1, 2008.
(B) Corrective distributions for plan years beginning before
January 1, 2008.
* * * * *
(4) * * *
(iii) Special rule for eligible automatic contribution
arrangements.
* * * * *
Sec. 1.401(m)-3 Safe Harbor Requirements.
(a) * * *
(1) Section 401(m)(11) safe harbor.
(2) Section 401(m)(12) safe harbor.
(3) Requirements applicable to safe harbor contributions.
* * * * *
0
Par. 8. Section 1.401(m)-1 is amended by:
0
1. Revising paragraph (b)(1)(iii) and adding paragraph (b)(1)(iv).
0
2. Revising the last sentence of paragraph (b)(4)(iii)(B).
0
3. Revising the fifth sentence of paragraph (c)(2).
The additions and revisions read as follows:
Sec. 1.401(m)-1 Employee contributions and matching contributions.
* * * * *
(b) * * *
(1) * * *
(iii) The ACP safe harbor provisions of section 401(m)(12)
described in Sec. 1.401(m)-3; or
(iv) The SIMPLE 401(k) provisions of sections 401(k)(11) and
401(m)(10) described in Sec. 1.401(k)-4.
* * * * *
(4) * * *
(iii) * * *
(B) Arrangements with inconsistent ACP testing methods. * * *
Similarly, an employer may not aggregate a plan (within the meaning of
Sec. 1.410(b)-7) that is using the ACP safe harbor provisions of
section 401(m)(11) or 401(m)(12) and another plan that is using the ACP
test of section 401(m)(2).
* * * * *
(c) * * *
(2) Plan provision requirement. * * * Similarly, a plan that uses
the safe harbor method of section 401(m)(11) or 401(m)(12), as
described in paragraphs (b)(1)(ii) and (b)(1)(iii) of this section,
must specify the default percentages that apply for the plan year and
whether the safe harbor contribution will be the nonelective safe
harbor contribution or the matching safe harbor contribution, and is
not permitted to provide that ACP testing will be used if the
requirements for the safe harbor are not satisfied. * * *
* * * * *
0
Par. 9. Section 1.401(m)-2 is amended by:
0
1. Revising the first and second sentences of paragraph (a)(5)(iv).
0
2. Revising paragraph (a)(5)(v).
0
3. Adding a new sentence at the end of paragraph (a)(6)(ii).
0
4. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
0
5. Removing paragraph (b)(2)(iv)(E).
0
6. Redesignating paragraph (b)(2)(iv)(F) as paragraph (b)(2)(iv)(E).
0
7. Revising paragraph (b)(2)(vi)(A).
0
8. Adding a new sentence to the beginning of paragraph (b)(2)(vi)(B).
0
9. Adding paragraph (b)(4)(iii).
The additions and revisions read as follows:
Sec. 1.401(m)-2 ACP test.
(a) * * *
(5) * * *
(iv) Matching contributions taken into account. A plan that
satisfies the ACP safe harbor requirements of section 401(m)(11) or
401(m)(12) for a plan year but nonetheless must satisfy the
requirements of this section because it provides for employee
contributions for such plan year is permitted to apply this section
disregarding all matching contributions with respect to all eligible
employees. In addition, a plan that satisfies the ADP safe harbor
requirements of Sec. 1.401(k)-3 for a plan year using qualified
matching contributions but does not satisfy the ACP safe harbor
requirements of section 401(m)(11) or 401(m)(12) for such plan year is
permitted to apply this section by excluding matching contributions
with respect to all eligible employees that do not exceed 4 percent
(3\1/2\ percent in the case of a plan that satisfies the ADP safe
harbor under section 401(k)(13)) of each employee's compensation. * * *
(v) Treatment of forfeited matching contributions. A matching
contribution that is forfeited because the contribution to which it
relates is treated as an excess contribution, excess deferral, excess
aggregate contribution, or default elective contribution that is
distributed under section 414(w), is not taken into account for
purposes of this section.
* * * * *
(6) * * * * *
(ii) Elective contributions taken into account under the ACP test.
* * * In addition, for plan years ending on or after November 8, 2007,
elective contributions which are not permitted to be taken into account
for the ADP test for the plan year under Sec. 1.401(k)-
[[Page 8211]]
2(a)(5)(ii), (iii), (v), or (vi) are not permitted to be taken into
account for the ACP test.
* * * * *
(b) * * * * *
(2) * * * * *
(iv) Income allocable to excess aggregate contributions--(A)
General rule. For plan years beginning on or after January 1, 2008, the
income allocable to excess aggregate contributions is equal to the
allocable gain or loss through the end of the plan year. See paragraph
(b)(2)(iv)(D) of this section for rules that apply to plan years
beginning before January 1, 2008.
* * * * *
(D) Plan years before 2008. For plan years beginning before January
1, 2008, the income allocable to excess aggregate contributions is
determined under Sec. 1.401(m)-2(b)(2)(iv) (as it appeared in the
April 1, 2007 edition of 26 CFR part 1).
* * * * *
(vi) Tax treatment of corrective distributions--(A) Corrective
distributions for plan years beginning on or after January 1, 2008.
Except as otherwise provided in this paragraph (b)(2)(vi), for plan
years beginning on or after January 1, 2008, a corrective distribution
of excess aggregate contributions (and allocable income) is includible
in the employee's gross income in the taxable year of the employee in
which distributed. The portion of the distribution that is treated as
an investment in the contract and is therefore not subject to tax under
section 72 is determined without regard to any plan contributions other
than those distributed as excess aggregate contributions. Regardless of
when the corrective distribution is made, it is not subject to the
early distribution tax of section 72(t). See paragraph (b)(4) of this
section for additional rules relating to the employer excise tax on
amounts distributed more than 2\1/2\ months (6 months in the case of
certain plans that include an eligible automatic contribution
arrangement within the meaning of section 414(w)) after the end of the
plan year. See also Sec. 1.402(c)-2, A-4, prohibiting rollover of
distributions that are excess aggregate contributions.
(B) Corrective distributions for plan years beginning before
January 1, 2008. The tax treatment of corrective distributions for plan
years beginning before January 1, 2008, is determined under Sec.
1.401(m)-2(b)(2)(vi) (as it appeared in the April 1, 2007, edition of
26 CFR Part 1). * * *
(4) * * *
(iii) Special rule for eligible automatic contribution
arrangements. In the case of excess aggregate contributions under a
plan that includes an eligible automatic contribution arrangement
(within the meaning of section 414(w)), 6 months is substituted for
2\1/2\ months in paragraph (b)(4)(i) of this section. The additional
time described in this paragraph (b)(4)(iii) applies to a distribution
of excess aggregate contributions for a plan year beginning on or after
January 1, 2010 only where all the eligible NHCEs and eligible HCEs are
covered employees under the eligible automatic contribution arrangement
(within the meaning of Sec. 1.414(w)-1(e)(3)) for the entire plan year
(or for the portion of the plan year that the eligible NHCEs and
eligible HCEs are eligible employees).
* * * * *
0
Par. 10. Section 1.401(m)-3 is amended by:
0
1. Revising paragraph (a).
0
2. Revising the first sentences of paragraphs (f)(1) and (j)(3).
The revisions read as follows:
Sec. 1.401(m)-3 Safe harbor requirements.
(a) ACP test safe harbor--(1) Section 401(m)(11) safe harbor.
Matching contributions under a plan satisfy the ACP safe harbor
provisions of section 401(m)(11) for a plan year if the plan satisfies
the safe harbor contribution requirement of paragraph (b) or (c) of
this section for the plan year, the limitations on matching
contributions of paragraph (d) of this section, the notice requirement
of paragraph (e) of this section, the plan year requirements of
paragraph (f) of this section, and the additional rules of paragraphs
(g), (h) and (j) of this section, as applicable.
(2) Section 401(m)(12) safe harbor. For a plan year beginning on or
after January 1, 2008, matching contributions under a plan satisfy the
ACP safe harbor provisions of section 401(m)(12) for a plan year if the
matching contributions are made with respect to an automatic
contribution arrangement described in paragraph Sec. 1.401(k)-3(j)
that satisfies the safe harbor requirements of Sec. 1.401(k)-3, the
limitations on matching contributions of paragraph (d) of this section,
the notice requirement of paragraph (e) of this section, the plan year
requirements of paragraph (f) of this section, and the additional rules
of paragraphs (g), (h) and (j) of this section, as applicable.
(3) Requirements applicable to safe harbor contributions. Pursuant
to sections 401(k)(12)(E)(ii) and 401(k)(13)(D)(iv), the safe harbor
contribution requirement of paragraph (b) or (c) of this section and
Sec. 1.401(k)-3(k) must be satisfied without regard to section 401(l).
The contributions made under paragraphs (b) and (c) of this section and
Sec. 1.401(k)-3(k) are referred to as safe harbor nonelective
contributions and safe harbor matching contributions.
* * * * *
(f) Plan year requirement--(1) General rule. Except as provided in
this paragraph (f) or in paragraph (g) of this section, a plan will
fail to satisfy the requirements of section 401(m)(11), section
401(m)(12), and this section unless plan provisions that satisfy the
rules of this section are adopted before the first day of that plan
year and remain in effect for an entire 12-month plan year. * * *
* * * * *
(j) * * *
(3) Early participation rules. Section 401(m)(5)(C) and Sec.
1.401(m)-2(a)(1)(iii)(A), which provide an alternative
nondiscrimination rule for certain plans that provide for early
participation, do not apply for purposes of section 401(m)(11), section
401(m)(12), and this section. * * *
* * * * *
0
Par. 11. Section 1.402(c)-2, A-4, is amended by redesignating paragraph
(h) as (j), adding a new paragraph (h), and adding and reserving
paragraph (i) to read as follows:
Sec. 1.402(c)-2 Eligible rollover distributions, questions and
answers.
* * * * *
A-4 * * *
(h) A distribution that is a permissible withdrawal from an
eligible automatic contribution arrangement within the meaning of
section 414(w).
(i) [Reserved]
* * * * *
0
Par. 12. Section 1.411(a)-4 is amended by revising paragraph (b)(7) to
read as follows:
Sec. 1.411(a)-4 Forfeitures, suspensions, etc.
* * * * *
(b) * * *
(7) Certain matching contributions. A matching contribution (within
the meaning of section 401(m)(4)(A) and Sec. 1.401(m)-1(a)(2)) is not
treated as forfeitable even if under the plan it may be forfeited under
Sec. 1.401(m)-2(b)(1) because the contribution to which it relates is
treated as an excess contribution (within the meaning of Sec. Sec.
1.401(k)-2(b)(2)(ii) and 1.401(k)-6), excess deferral (within the
meaning of Sec. 1.402(g)-1(e)(1)(iii)), excess aggregate contribution
(within the meaning of Sec. 1.401(m)-5), or a default elective
[[Page 8212]]
contribution (within the meaning of Sec. 1.414(w)-1(e)) that is
withdrawn in accordance with the requirements of Sec. 1.414(w)-1(c).
* * * * *
0
Par. 13. Section 1.414(w)-1 is added to read as follows:
Sec. 1.414(w)-1 Permissible Withdrawals From Eligible Automatic
Contribution Arrangements.
(a) Overview. Section 414(w) provides rules under which certain
employees are permitted to elect to make a withdrawal of default
elective contributions from an eligible automatic contribution
arrangement. This section sets forth the rules applicable to
permissible withdrawals from an eligible automatic contribution
arrangement within the meaning of section 414(w). Paragraph (b) of this
section defines an eligible automatic contribution arrangement.
Paragraph (c) of this section describes a permissible withdrawal and
addresses which employees are eligible to elect a withdrawal, the
timing of the withdrawal election, and the amount of the withdrawal.
Paragraph (d) of this section describes the tax and other consequences
of the withdrawal. Paragraph (e) of this section includes the
definitions applicable to this section.
(b) Eligible automatic contribution arrangement--(1) In general. An
eligible automatic contribution arrangement is an automatic
contribution arrangement under an applicable employer plan that is
intended to be an eligible automatic contribution arrangement for the
plan year and that satisfies the uniformity requirement under paragraph
(b)(2) of this section, and the notice requirement under paragraph
(b)(3) of this section. An eligible automatic contribution arrangement
need not cover all employees who are eligible to elect to have
contributions made on their behalf under the applicable employer plan.
(2) Uniformity requirement--(i) In general. An eligible automatic
contribution arrangement must provide that the default elective
contribution is a uniform percentage of compensation.
(ii) Exception to uniform percentage requirement. An arrangement
does not violate the uniformity requirement of paragraph (b)(2)(i) of
this section merely because the percentage varies in a manner that is
permitted under Sec. 1.401(k)-3(j)(2)(iii), except that the rule of
Sec. 1.401(k)-3(j)(2)(iii)(B) is applied without regard to whether the
arrangement is intended to be a qualified automatic contribution
arrangement.
(iii) Rules of application. For purposes of this paragraph (b)(2),
all automatic contribution arrangements that are intended to be
eligible automatic contribution arrangements within a plan (or within
the disaggregated plan under Sec. 1.410(b)-7, in the case of a plan
subject to section 410(b)) are aggregated. Thus, for example, if a
single plan within the meaning of section 414(l) covering employees in
two separate divisions has two different automatic contribution
arrangements that are intended to be eligible automatic contributions
arrangements, the two automatic contribution arrangements can
constitute eligible automatic contribution arrangements only if the
default elective contributions under the arrangements are the same
percentage of compensation. However, if the different automatic
contribution arrangements cover employees in portions of the plan that
are mandatorily disaggregated under the rules of section 410(b), then
there is no requirement to aggregate those automatic contribution
arrangements under the uniformity requirements of this paragraph
(b)(2).
(3) Notice requirement--(i) General rule. The notice requirement of
this paragraph (b)(3) is satisfied for a plan year if each covered
employee is given notice of the employee's rights and obligations under
the arrangement. The notice must be sufficiently accurate and
comprehensive to apprise the employee of such rights and obligations,
and be written in a manner calculated to be understood by the average
employee to whom the arrangement applies. The notice must be in
writing; however, see Sec. 1.401(a)-21 for rules permitting the use of
electronic media to provide applicable notices.
(ii) Content requirement. The notice must include the provisions
found in Sec. 1.401(k)-3(d)(2)(ii) to the extent those provisions
apply to the arrangement. A notice is not considered sufficiently
accurate and comprehensive unless the notice accurately describes--
(A) The level of the default elective contributions which will be
made on the employee's behalf if the employee does not make an
affirmative election;
(B) The employee's rights to elect not to have default elective
contributions made to the plan on his or her behalf or to have a
different percentage of compensation or different amount of
contribution made to the plan on his or her behalf;
(C) How contributions made under the arrangement will be invested
in the absence of any investment election by the employee; and
(D) The employee's rights to make a permissible withdrawal, if
applicable, and the procedures to elect such a withdrawal.
(iii) Timing--(A) General rule. The timing requirement of this
paragraph (b)(3)(iii) is satisfied if the notice is provided within a
reasonable period before the beginning of each plan year or, in the
plan year the employee is first eligible to make a cash or deferred
election (or first becomes covered under the automatic contribution
arrangement as a result of a change in employment status), within a
reasonable period before the employee becomes a covered employee. In
addition, a notice satisfies the timing requirements of paragraph
(b)(3) of this section only if it is provided sufficiently early so
that the employee has a reasonable period of time after receipt of the
notice in order to make the election described under paragraph
(e)(2)(i) or (e)(2)(ii) of this section.
(B) Deemed satisfaction of timing requirement. The timing
requirement of this paragraph (b)(3)(iii) is satisfied if at least 30
days (and no more than 90 days) before the beginning of each plan year,
the notice is given to each employee covered under the automatic
contribution arrangement for the plan year. In the case of an employee
who does not receive the notice within the period described in the
previous sentence because the employee becomes eligible to make a cash
or deferred election (or becomes covered under the automatic
contribution arrangement as a result of a change in employment status)
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 to make a cash or
deferred election (or becomes covered under the automatic contribution
arrangement as a result of a change in employment status), and no later
than the date that affords the employee a reasonable period of time
after receipt of the notice to make the election described under
paragraph (e)(2)(i) or (e)(2)(ii) of this section. 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 to make a cash
or deferred election, 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.
(c) Permissible withdrawal--(1) In general. If the plan so
provides, any
[[Page 8213]]
employee who has default elective contributions made under the eligible
automatic contribution arrangement may elect to make a withdrawal of
such contributions (and earnings attributable thereto) in accordance
with the requirements of this paragraph (c). An applicable employer
plan that includes an eligible automatic contribution arrangement will
not fail to satisfy the prohibition on in-service withdrawals under
section 401(k)(2)(B), 403(b)(7), 403(b)(11), or 457(d)(1) merely
because it permits withdrawals that satisfy the timing requirement of
paragraph (c)(2) of this section and the amount requirement of
paragraph (c)(3) of this section.
(2) Timing--(i) Last date to make election. A covered employee's
election to withdraw default elective contributions must be made no
later than 90 days after the date of the first default elective
contribution under the eligible automatic contribution arrangement and
must be effective no later than the date set forth in paragraph
(c)(2)(iii) of this section. A plan is permitted to set an earlier
deadline for making this election, but if a plan provides that a
covered employee may withdraw default elective contributions, then the
election period for the covered employee must be at least 30 days.
(ii) Determination of date of first default elective contribution.
For purposes of this paragraph (c)(2), the date of the first default
elective contribution is the date that the compensation that is subject
to the cash or deferred election would otherwise have been included in
gross income.
(iii) Latest effective date of the election. The effective date of
an election described in this paragraph (c)(2) cannot be after the
earlier of--
(A) The pay date for the second payroll period that begins after
the date the election is made; and
(B) The first pay date that occurs at least 30 days after the
election is made.
(iv) Special rules--(A) Treatment of periods without default
elective contributions. For purposes of determining the date of the
first default elective contribution under the eligible automatic
contribution arrangement, a plan is permitted to treat an employee who
for an entire plan year did not have default elective contributions
made under the eligible automatic contribution arrangement as if the
employee had not had such contributions for any prior plan year as
well.
(B) Treatment relating to aggregation of arrangements. The
determination of whether an election is made no later than 90 days
after the date of the first default elective contribution under the
eligible automatic contribution arrangement must take into account any
other eligible automatic contribution arrangement that is required to
be aggregated with the eligible automatic contribution arrangement
under the rules of paragraph (b)(2)(iii) of this section.
(3) Amount and timing of distributions--(i) In general. A
distribution satisfies the requirement of this paragraph (c)(3) if the
distribution is equal to the amount of default elective contributions
made under the eligible automatic contribution arrangement through the
effective date of the election described in paragraph (c)(2) of this
section (adjusted for allocable gains and losses to the date of
distribution). If default elective contributions are separately
accounted for in the participant's account, the amount of the
distribution will be the total amount in that account. However, if
default elective contributions are not separately accounted for under
the plan, the amount of the allocable gains and losses will be
determined under rules similar to those provided under Sec. 1.401(k)-
2(b)(2)(iv) for the distribution of excess contributions.
(ii) Fees. The distribution amount as determined under this
paragraph (c)(3) may be reduced by any generally applicable fees.
However, the plan may not charge a higher fee for a distribution under
section 414(w) than would apply to any other distributions of cash.
(iii) Date of distribution. The distribution must be made in
accordance with the plan's ordinary timing procedures for processing
distributions and making distributions.
(d) Consequences of the withdrawal--(1) Income tax consequences--
(i) Year of inclusion. The amount of the withdrawal is includible in
the eligible employee's gross income for the taxable year in which the
distribution is made. However, any portion of the distribution
consisting of designated Roth contributions is not included in an
employee's gross income a second time. The portion of the withdrawal
that is treated as an investment in the contract is determined without
regard to any plan contributions other than those distributed as a
withdrawal of default elective contributions.
(ii) No additional tax on early distributions from qualified
retirement plans. The withdrawal is not subject to the additional tax
under section 72(t).
(iii) Reporting. The amount of the withdrawal is reported on Form
1099-R, ``Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc.,'' as described in the
applicable instructions.
(iv) Disregarded for purposes of section 402(g). The amount of the
withdrawal is not taken into account in determining the limitation on
elective deferrals under section 402(g).
(2) Forfeiture of matching contributions. In the case of any
withdrawal made under paragraph (c) of this section, employer matching
contributions with respect to the amount withdrawn that have been
allocated to the participant's account (adjusted for allocable gains
and losses) must be forfeited. A plan is permitted to provide that
employer matching contributions will not be made with respect to any
withdrawal made under paragraph (c) of this section if the withdrawal
has been made prior to the date as of which the match would otherwise
be allocated.
(3) Consent rules. A withdrawal made under paragraph (c) of this
section may be made without regard to any notice or consent otherwise
required under section 401(a)(11) or 417.
(e) Definitions. Unless indicated otherwise, the following
definitions apply for purposes of section 414(w) and this section.
(1) Applicable employer plan. An applicable employer plan means a
plan that--
(i) Is qualified under section 401(a);
(ii) Satisfies the requirements of section 403(b);
(iii) Is a section 457(b) eligible governmental plan described in
Sec. 1.457-2(f);
(iv) Is a simplified employee pension the terms of which provide
for a salary reduction arrangement described in section 408(k)(6); or
(v) Is a SIMPLE described in section 408(p).
(2) Automatic contribution arrangement. An automatic contribution
arrangement means an arrangement that provides for a cash or deferred
election and which specifies that, in the absence of a covered
employee's affirmative election, a default election applies under which
the employee is treated as having elected to have default elective
contributions made on his or her behalf under the plan. The default
election begins to apply with respect to an eligible employee no
earlier than a reasonable period of time after receipt of the notice
describing the automatic contribution arrangement. This default
election ceases to apply with respect to an eligible employee for
periods of time with respect to which the employee has an affirmative
election that is currently in effect to--
[[Page 8214]]
(i) Not have any default elective contributions made on his or her
behalf; or
(ii) Have contributions made in a different amount or percentage of
compensation.
(3) Covered employee. Covered employee means an employee who is
covered under the automatic contribution arrangement, determined under
the terms of the plan. A plan must provide whether an employee who
makes an affirmative election remains a covered employee. If a plan
provides that an employee who makes an affirmative election described
in paragraph (e)(2)(i) or (e)(2)(ii) of this section remains a covered
employee, then the employee must continue to receive the notice
described in paragraph (b)(3) of this section and the plan may be
eligible for the excise tax relief with respect to excess amounts
distributed within 6 months after the end of the plan year under
section 4979(f)(1). Such an employee will also have the default
election reapply if the plan provides that the employee's prior
affirmative election no longer remains in effect and the employee does
not make a new affirmative election.
(4) Default elective contributions. Default elective contributions
means the contributions that are made at a specified level or amount
under an automatic contribution arrangement in the absence of a covered
employee's affirmative election that are--
(i) Contributions described in section 402(g)(3); or
(ii) Contributions made to an eligible governmental plan within the
meaning of Sec. 1.457-2(f) that would be elective contributions if
they were made under a qualified plan.
(f) Effective/applicability date--(1) Statutory effective date.
Section 414(w) applies to plan years beginning on or after January 1,
2008.
(2) Regulatory effective date. This section applies to 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 this section will be treated as operating
in accordance with a good faith interpretation of section 414(w).
PART 54--PENSION EXCISE TAXES
0
Par. 14. The authority citation for part 54 continues to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 15. Section 54.4979-1, paragraph (c)(1) is revised to read as
follows:
Sec. 54.4979-1 Excise tax on certain excess contributions and excess
aggregate contributions.
* * * * *
(c) No tax when excess distributed within 2\1/2\ months after close
of year or additional employer contributions made--(1) General rule. No
tax is imposed under this section on any excess contribution or excess
aggregate contribution, as the case may be, to the extent the
contribution (together with any income allocable thereto) is corrected
before the close of the first 2\1/2\ months of the following plan year
(6 months in the case of a plan that includes an eligible automatic
contribution arrangement within the meaning of section 414(w)). The
extension to 6 months applies to a distribution of excess contributions
or excess aggregate contributions for a plan year beginning on or after
January 1, 2010, only where all the eligible NHCEs and eligible HCEs
(both as defined in Sec. 1.401(k)-6 of this Chapter) are covered
employees under an eligible automatic contribution arrangement within
the meaning of section 414(w) for the entire plan year (or the portion
of the plan year that the eligible NHCEs and eligible HCEs are eligible
employees under the plan)). Qualified nonelective contributions and
qualified matching contributions taken into account under Sec.
1.401(k)-2(a)(6) of this Chapter or qualified nonelective contributions
or elective contributions taken into account under Sec. 1.401(m)-
2(a)(6) of this Chapter for a plan year may permit a plan to avoid
excess contributions or excess aggregate contributions, respectively,
even if made after the close of the 2\1/2\ month (or 6 month) period
for distributing excess contributions or excess aggregate contributions
without the excise tax. See Sec. 1.401(k)-2(b)(1)(i) and (5)(i) of
this Chapter for methods to avoid excess contributions, and Sec.
1.401(m)-2(b)(1)(i) of the Chapter for methods to avoid excess
aggregate contributions.
* * * * *
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement,
Approved: January 16, 2009.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E9-3716 Filed 2-23-09; 8:45 am]
BILLING CODE 4830-01-P