Yesterday, the IRS released Proposed Regulations on Automatic Contribution Arrangements. They contain some answers on the new Qualified Automatic Contribution Arrangement (QACA), created last year by Section 902 of the Pension Protection Act.
Does a QACA satisfy the 401(k)(13) safe harbor?
Yes. For plan years beginning on or after January 1, 2008, a cash or deferred arrangement satisfies the ADP safe harbor provision of Code 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 is referred to as a qualified automatic contribution arrangement. See Proposed Treas. Reg. 1.401(k)-3(a)(3).
Once a QACA is implemented, can it be discontinued before the end of the plan year and still satisfy the safe harbor ADP requirements?
No. 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. See Proposed Treas. Reg. 1.401(k)-3(e)(1).
What is the matching contribution for a QACA?
In applying the requirement of paragraph (c) of this section, in the case of a cash or deferred arrangement described in paragraph (j) of this section, 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. See Proposed Treas. Reg. 1.401(k)-3(k)(2).
What is the vesting requirement of QACA matching contributions?
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 contribution. See Proposed Treas. Reg. 1.401(k)-3(k)(3).
What additional information must be included in the QACA notice provided to employees?
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 automatic contribution 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 automatic contribution 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 made under the automatic contribution arrangement will be invested in the absence of an investment election by the employee).
If the plan sponsor wants to implement a QACA, and some participants have made affirmative elections not to defer or to defer at a different rate than the QACA, does the QACA fail unless the current employees are automatically enrolled at the QACA rates?
No. An automatic contribution arrangement will not fail to be a QACA merely because the default election provided under Proposed Treas. Reg. 1.401(k)-3(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 QACA and on that effective date has 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. Proposed Treas. Reg. 1.401(k)-3(j)(1)(iii).
Does the uniformity requirement for a QACA mean that all employees must defer at the same percentage?
No. Under section 401(k)(13)(C)(iii), the qualified percentage must be applied uniformly to all eligible employees. The proposed regulations would provide that a plan does not fail this requirement merely because the percentage varies for the following reasons: (1) the percentage varies based on the number of years an eligible employee has participated in the automatic contribution arrangement intended to be a QACA; (2) the rate of elective contributions under a cash or deferred election that is in effect on the effective date of the default percentage under the QACA is not reduced; or (3) the amount 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 section 402(g)(7)) or 415. See pages 12-13 of preamble to the Proposed Regulations.
Can any forfeitures resulting from the withdrawal of deferrals made pursuant to a QACA revert to the employer?
No. In the case of any withdrawal made under paragraph (c) of this section, employer matching contributions with respect to the amount withdrawn must be forfeited. See Proposed Treas. Reg. 1.414(w)-1(d)(2). An employer matching contribution with respect to the default elective contribution distributed pursuant to section 414(w) must be forfeited. The forfeited matching contribution is not a mistaken contribution or other erroneous contribution, and, thus, it cannot be returned to the employer (or be distributed to the employee as is permitted for an excess aggregate contribution). The proposed regulations would provide that the forfeited contribution must remain in the plan and be treated in the same manner under the plan terms as any other forfeiture under the plan. See page 17 of the preamble to the Proposed Regulations.
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