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IRS Issues Notices and Guidance on Retirement Savings

October 2009
Executive Compensation, Benefits, Employment and Labor Focus
Laura L. Chang

On September 5, 2009, President Obama and Secretary of the Treasury Tim Geithner announced new initiatives to promote retirement savings. As part of those initiatives, the Internal Revenue Service (the "IRS") issued several Notices and Revenue Rulings to encourage greater retirement savings through vehicles such as automatic enrollment in employer-sponsored individual account defined contribution plans, such as 401(k)s and SIMPLE IRAs, as well as to clarify the rules on plan amendments regarding contributions of unused paid time off, and to provide model notices for eligible rollover distributions. A summary of these Notices and Revenue Rulings is below.

Rev. Rul. 2009-31: Annual Paid Time Off Contributions Under Qualified Retirement Plans

In Revenue Ruling 2009-31, the IRS concluded that amendments to a tax-qualified retirement plan to require annual nonelective contributions, or to permit annual elective contributions, to the plan of the dollar equivalent of unused paid time off will not cause the plan to lose its tax-qualified status. However, such contributions must satisfy the applicable nondiscrimination requirements and limitations under the Code for the year in which the contributions are made. The IRS clarified that assuming that the applicable tax qualification requirements are satisfied, a participant does not include in gross income contributions to the plan of the dollar equivalent of unused paid time off until distributions are made to the participant from the plan. For purposes of Revenue Ruling 2009-31, paid time off refers to paid sick and vacation leave without regard to whether the leave is due to illness or incapacity.

Rev. Rul. 2009-32: Paid Time Off Contributions at Termination of Employment Under Qualified Retirement Plans

Whereas Revenue Ruling 2009-31 addresses plan amendments with respect to annual contributions of the dollar equivalent of unused paid time off, Revenue Ruling 2009-32 addresses plan amendments with respect to contributions of the dollar equivalent of unused paid time off at a participant's termination of employment. The IRS arrived at the same conclusions in Revenue Ruling 2009-32 as it did in Revenue Ruling 2009-31 (see above).

Rev. Rul. 2009-30: Automatic Contribution Increases under Automatic Contribution Arrangements

Often, defined contribution plans provide for automatic enrollment of new employees in the plan. Such arrangements are called "automatic contribution arrangements," which provide that an employee will be automatically enrolled in the plan, and will be treated as having made an election to have a specified percentage of his or her compensation contributed to the plan, unless the employee either elects to contribute a different amount to the plan or affirmatively opts out of contributing to the plan. All automatic contribution arrangements must meet certain requirements, including complying with restrictions on distributions of contributions and satisfying nondiscrimination standards, so that they will be considered "qualified cash or deferred arrangements," or "qualified CODAs," for purposes of Code Section 401(k). Contributions made under qualified cash or deferred arrangements are often referred to as "elective contributions." Two specific types of automatic contribution arrangements that are considered qualified CODAs are "qualified automatic contribution arrangements," or "QACAs," and "eligible automatic contribution arrangements," or "EACAs." Under a QACA, all eligible employees (current and new hires) who have not made an affirmative election to defer or decline participation are treated as having elected to defer an amount equal to a certain percentage of compensation, and an employer that implements a QACA may provide for a lower amount of matching contributions than under a regular automatic contribution arrangement and still qualify for relief from performing required nondiscrimination tests. Under an EACA, participants are treated as having elected to defer an amount equal to a uniform percentage of compensation provided under the plan until they specifically opt out of the arrangement, and an employer that implements an EACA is provided with an extended period to refund any excess contributions, as determined by the nondiscrimination tests, without incurring excise taxes. If a plan's automatic enrollment provisions meet either the QACA or the EACA requirements under Code Section 401(k) (or both), then those provisions are considered to automatically be qualified CODAs. (For more information on automatic contribution arrangements, QACAs and EACAs, see White & Case's August 2008 article entitled "Navigating the ACA, EACA, QACA and QDIA Rules," available here: whitecase.com/ecbelfocus_0808_4.)

In Revenue Ruling 2009-30, the IRS provided additional guidance on whether automatic contribution arrangements under which the default contribution percentage automatically increases in future years should be considered qualified CODAs. Specifically, the IRS concluded that where an automatic contribution arrangement provides for an automatic increase in an eligible employee's default contribution percentage for plan years after the first plan year in which the employee participates, and that increase is based in part on future increases in the employee's base pay, the resulting default contribution will still be considered an "elective contribution," and therefore, the arrangement will still be a qualified CODA. The IRS similarly concluded that an automatic contribution arrangement will not fail to qualify as a QACA or an EACA where the arrangement provides that an eligible employee's default contribution percentage will increase annually on a date other than the first day of the plan year.

Notice 2009-65: Adding Automatic Enrollment to Section 401(k) Plans – Sample Amendments

Notice 2009-65 provides two sample amendments that plan sponsors can adopt in order to add an automatic enrollment feature to their plans. Both sample amendments are designed to meet Code requirements, and IRS guidelines, for qualified CODAs. The first sample amendment is designed to add a basic automatic contribution arrangement to a 401(k) plan; the second sample amendment is designed to add an EACA to a 401(k) plan. Both amendments may need to be modified to conform to a plan's individual terms and administrative procedures, and must be adopted by the later of (1) the plan year in which the amendment will be effective, pursuant to the deadlines provided in IRS Revenue Procedure 2007-44, or (2) the deadline under the PPA for adopting amendments made pursuant to the PPA. The sample amendments are available here.

Notice 2009-66: Automatic Enrollment in SIMPLE IRAs

SIMPLE IRAs are simplified tax-favored retirement plans for small employers. Generally, in order to establish a SIMPLE IRA, the employer must have 100 or fewer employees and cannot sponsor any other retirement plans. Notice 2009-66 provides guidance, in the form of Questions and Answers ("Q&As"), to assist employers that sponsor a SIMPLE IRA in adding an automatic enrollment feature to such plans. Among other things, the Q&As confirm that a SIMPLE IRA may include an automatic contribution arrangement, and that such an arrangement can provide for a default contribution percentage that increases annually based on the number of years, or portions of years, for which default salary reduction contributions have been made for the employee, and provide additional notice requirements for SIMPLE IRAs that include an automatic contribution arrangement. (Note that 401(k) plans already had the right to add an automatic contribution arrangement.)

Notice 2009-67: Adding Automatic Enrollment to SIMPLE IRAs – Sample Amendment

Notice 2009-67 provides a sample amendment that a prototype sponsor of a SIMPLE IRA can use in drafting an amendment to add an automatic contribution arrangement feature. The sample amendment is designed to meet Code requirements, and IRS guidelines, for such arrangements. The sample amendment may need to be modified by the prototype sponsor to conform the language to meet the SIMPLE IRA's terms and administrative procedures, and employers that wish to add an automatic enrollment feature will need to adopt the amendment provided by their prototype sponsor prior to the effective date of the automatic contribution arrangement. The sample amendment is available here.

IRS Notice 2009-68: Model Notices for Eligible Rollover Distributions

Code Section 402(f) requires plan administrators of qualified retirement plans to provide a written explanation to any recipient of an eligible rollover distribution within a reasonable period of time before the plan makes such distribution. In Notice 2009-68, the IRS issued two safe harbor explanations that employers may use to satisfy the Section 402(f) notice requirement. The first explanation applies to a distribution not from a designated Roth account, and the second explanation applies to a distribution from a designated Roth account. Notice 2009-68 reflects changes made to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Pension Protection Act of 2006 (the "PPA") that affect the information required to be provided in a Section 402(f) notice. Notice 2009-68 also explains rules that apply in special situations, such as when a distribution is made to a nonresident alien. The safe harbor explanations in Notice 2009-68 modify and supersede the explanations in Notice 2002-3, which will continue to be safe harbor explanations with respect to notices provided through December 31, 2009.

White & Case would be happy to provide counsel to you in amending your plans to take advantage of the retirement savings options discussed above.

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