As part of the “Retirement & Savings Initiatives” recently announced by President Obama, the IRS and Treasury issued four notices and three revenue rulings on September 5, 2009. The notices and revenue rulings can be accessed by clicking here.
In general, the notices provide: (i) sample amendments that plan sponsors may use to add an automatic enrollment feature (also known as an automatic contribution arrangement or “ACA”) to 401(k) and SIMPLE IRA plans, (ii) guidance on using an ACA in SIMPLE IRA plans and (iii) two updated safe harbor explanations (also called §402(f) notices) for eligible rollover distributions. The first revenue ruling explains rules for implementing automatic increases in ACA default contribution percentages. The other revenue rulings describe the circumstances in which unused vacation and sick pay can be contributed to a retirement plan, either on an annual basis or upon termination of employment.
Notice 2009-65 provides sample language that 401(k) plan sponsors may adopt to add an ACA to their retirement plans. The Notice acknowledges that plan sponsors may need to modify the amendments to match their specific plan terms and administrative procedures. These amendments must be adopted by the later of: (i) the end of the plan year in which the amendment is effective, or (ii) the last day of the first plan year beginning on or after January 1, 2009. Plan sponsors must notify affected employees of the features of the amended plan within a reasonable time period prior to the amendment’s effective date.
Notice 2009-66 provides assistance to small employers on including an ACA in a SIMPLE IRA plan.
Notice 2009-67 contains sample automatic contribution language that a prototype sponsor of a SIMPLE IRA plan document may adopt. An employer that wishes to amend its SIMPLE IRA plan to include an ACA must adopt the amendment supplied by the prototype sponsor before the ACA’s effective date and also satisfy employee notice requirements.
Notice 2009-68 contains two updated safe harbor model notices that a plan may provide to participants receiving eligible rollover distributions to satisfy its §402(f) notice obligations. The IRS revised the notices to include changes in the law and to simplify the presentation and explanation of the applicable options. They also explain more technical rules that may apply in certain cases, such as when a distribution is made to a surviving spouse or other beneficiary. Plans may begin to use these model notices immediately or continue to use the prior notices contained in IRS Notice 2002-3 (if the prior notices have been appropriately modified for subsequent law changes) on a temporary basis through the end of the 2009 calendar year.
Revenue Ruling 2009-30 explains the circumstances in which 401(k) plans may allow automatic increases in an eligible employee’s default contribution percentage based upon an increase in an employee’s future base pay.
Revenue Ruling 2009-31 states that qualified plans may amend their terms to permit annual contributions equal to the dollar equivalent of the paid time off an employee failed to use. Revenue Ruling 2009-32 provides that, under certain circumstances, a qualified plan may allow employees upon termination of employment to contribute to the plan an amount equal to the dollar equivalent of the employee’s unused paid time off an employee. In both cases, these contributions cannot violate the nondiscrimination requirements, the annual addition limits or the annual elective deferral limits that apply to qualified plans. Such contributions would not be included in the employee’s gross income until they are distributed from the plan.
These new options for retirement plans provide new avenues for employees to save more of their income per year. Plan sponsors and employers can review their plan documents and decide whether they wish to include any of these new options in their retirement plans to promote employee retirement savings.