automatic enrollment in 401(k) plans
DESCRIPTION
This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP in conjunction with United Benefit Advisors. Automatic Enrollment in 401(k) Plans. Presented by: Rob Browning and Ken Mason. Meet The Presenters. Kenneth Mason Spencer Fane Britt & Browne LLP - PowerPoint PPT PresentationTRANSCRIPT
This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
Kansas City Omaha Overland ParkSt. Louis Jefferson City www.spencerfane.com
www.ubabenefits.com
This Employer Webinar Series program is presented by Spencer Fane Britt & Browne LLP
in conjunction with United Benefit Advisors
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Automatic Enrollment in 401(k) Plans
Presented by:Rob Browning and
Ken Mason
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Meet The Presenters
Ken Mason
Kenneth Mason
Spencer Fane Britt & Browne [email protected]
Robert Browning
Spencer Fane Britt & Browne [email protected]
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Topics of Discussion
Automatic Enrollment before PPA of 2006 Pension Protection Act codification of automatic
enrollment/preemption of state law and creation of new safe harbor
IRS and DOL Regulations regarding automatic enrollment, default investment options
Recent statutory tweaks – WRERA Recent IRS guidance, model language Correction of auto-enrollment errors
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Automatic Enrollment before 2007
Originally called “negative election” McDonalds may have had first plan Early IRS guidance:
Rev. Rul. 98-30 – 401(k) (new employees) Rev. Rul. 2000-8 - 401(k) (current employees) Rev. Rul. 2000-33 – 457(b) plans Rev. Rul. 2000-35 – 403(b) plans Ann. 2000 – available option for prototype plans
Final 401(k) regulations (issued in 2004, effective in 2006) define “cash or deferred arrangement” to include deferral by default
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Issues/Concerns before PPA
New vs. Current Employees State Laws re: withholding from wages
Laws vary from state to state ERISA Preemption – DOL view:
Advisory Opinion 94-27A Advisory Opinion 96-01A
Fiduciary Liability for “default” investments No ERISA Section 404(c) protection
Status as “elective deferrals” subject to 402(g) limit ($16,500 in 2009)
Negative election vs mandatory contribution
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Pension Protection Act of 2006
404(c) fiduciary relief for “qualified default investment alternatives”
Preemption of state laws that restrict “automatic contribution arrangements”
90-day withdrawal feature for “eligible automatic contribution arrangements”
Nondiscrimination safe harbor for “qualified automatic contribution arrangements”
Acronyms: QDIA, ACA, EACA, QACA
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Default Investments
Prior to PPA, no ERISA 404(c) protection for amounts invested by “default”
PPA adds ERISA Section 404(c)(5): Participant in individual account plan is treated as exercising
control over the assets in his/her account (including automatic contributions) if amounts are invested in accordance with DOL regulations re: QDIAs
Requires notice prior to each plan year Effective for plan years after 12/31/06 DOL was required to issue regulations within six months after
August 17, 2006 Final QDIA regulations issued October 24, 2007 (generally
effective Dec. 24, 2007)
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Preemption of State Law
PPA adds ERISA Section 514: ERISA supersedes any state law which would prohibit or
restrict a plan from including an “automatic contribution arrangement” (ACA)
ACA – an arrangement where: Participant may elect cash or deferral If no election, participant is treated as electing to defer a
uniform % of compensation Participant may elect a lower % (or no deferral) at any
time Contributions are invested in a QDIA
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Preemption of State Law
Statute requires notice to participants prior to beginning of plan year
Substantial penalty for failure to provide the required ACA notice – DOL may assess a civil penalty of up to $1,000 per day for each violation
Effective date of preemption provision was August 17, 2006
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Preemption of State Law - Scope
DOL authorized to issue regulations regarding minimum standards for arrangements entitled to preemption
Legislative history: state preemption rules are not limited to arrangements that are “ACAs” under ERISA
Final regulations re: QDIAs confirm: Preemption not limited to arrangements meeting ERISA
definition of ACA Pension plans may have an ACA that does not use QDIAs
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90-day Withdrawals under EACAs
Code Section 414(w) – allows withdrawal of automatic contributions under an EACA (does not violate distribution restrictions)
Must elect to withdraw within 90 days after the first “automatic” contribution
Must withdraw automatic contributions and earnings through date of election
Distributions are taxable in year of distribution No 10% penalty tax on distribution
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EACA Defined
An EACA is an arrangement where: Participant may elect cash or deferral If no election, participant is treated as electing to
defer uniform % of pay until the participant elects otherwise
Advance notice requirement is satisfied Contributions are invested in a QDIA*
* = QDIA requirement was removed by WRERA 2008
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EACAs – additional rules
Applies to 401(a), 403(b), govtl 457(b) plans Employer has six months (rather than 2 ½
months) to distribute excess contributions (ADP failures) and excess aggregate contributions (ACP failures) before distribution will be subject to 10% excise tax
Distributions of ADP/ACP excesses are no longer required to include “gap period” income
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Nondiscrimination Safe Harbor
New Code Sections create additional “safe harbor” from ADP/ACP testing for QACAs (for plan years beginning in 2008 or later)
QACA – an arrangement with: Specific auto-enrollment requirements Automatic increase requirements Required employer contributions Two-year cliff vesting of ER contributions
Applies to 401(k), 403(b), govtl 457(b) plans
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QACAs – Automatic Contributions
Automatic contribution percentage cannot exceed 10% of compensation
Contribution percentage for participant’s first two years of participation in the QACA must be at least 3% of compensation
Contribution percentage must be at least 4% in third year, 5% in fourth year, and 6% in any later year
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QACAs – Employer Contributions
Matching contributions option: 100% of first 1% of pay deferred; plus 50% of next 5% of pay deferred (3.5% employer contribution for those who defer
at least 6% of pay) Nonelective contributions option:
3% of compensation for all employees Employer contributions must be 100%
vested after 2 years of service
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QACAs – other requirements
Employer contributions are subject to the same withdrawal restrictions as elective deferrals (i.e., like QNECs)
Each employee eligible to participate in the QACA for the upcoming year must receive written notice before the beginning of the plan year
QACAs - exempt from top-heavy rules
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Guidance Since PPA
Proposed regulations (2007) answered certain questions raised by PPA, but imposed many restrictions
WRERA (2008) eased a few requirements (e.g., EACA need not use QDIA as default investment)
Final regulations (March 2009) eased other requirements (especially regarding timing of notices and “limited EACAs”)
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Guidance Since PPA
IRS Retirement Plans Newsletters (Summer and Fall 2009) provided correction guidance
Obama Administration’s Labor Day Weekend guidance: Clarified rules for auto deferral increases (Rev.
Rul. 2009-30)
Provided model plan language for ACAs and EACAs (Notice 2009-65)
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Auto Enrollment Advantages
Encourages employees to save for their retirement (inertia principle)
Facilitates larger deferrals by highly compensated employees (HCEs) More deferrals by non-HCEs improves
ADP/ACP test results QACA allows HCEs to defer maximum
dollar limit for year
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Current Trends
Recent Watson Wyatt survey found that 47% of large employers use auto enrollment, with another 1/3 of remaining employers considering doing so
51% of current auto deferral arrangements include auto increase feature
Median initial auto deferral percentage = 3% (range = 1% to 7%)
Median final auto deferral percentage = 6% (range = 3% to 20%)
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QACA Advantages
No ADP/ACP testing or correction required
Exempt from top-heavy rules
May apply (limited) vesting schedule to safe-harbor employer contributions
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QACA Requirements
Must include all eligible employees who have not made prior deferral election (including election not to defer)
Initial auto deferral percentage must be at least 3% Auto deferral percentages must be “uniform,” and Must provide for automatic increases in auto deferrals
Minimum employer safe-harbor contribution Notice of QACA must be provided during
reasonable period before each plan year and before employee becomes eligible
Must be in effect for full plan year
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Auto Increase Rules
Employee’s auto deferral percentage must be at least 4% by first day of second plan year after first auto deferral is made
Auto deferral percentage must then increase by 1% on first day of each subsequent plan year, until at least 6% (capped at 10%)
Auto deferral percentage may start at more than 3%, so long as minimum schedule is met
Auto increases may take effect prior to first day of plan year, so long as minimum schedule is met. E.g.: Each employee’s anniversary date, or Uniform date for salary increases
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Effects of Breaks in Service
General rule: Must disregard break in service when determining proper auto deferral percentage on rehire Example: Employee whose default deferral percentage
was 4% when terminating employment in October of 2010 -- and who fails to make affirmative deferral election upon reemployment in March of 2011 -- must have 5% default deferrals
Exception: Plan may treat employee with full plan-year break in employment as new employee Example: If employee in above example had returned to
employment in March of 2012, default deferrals could have been set at 3%
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Safe-Harbor Employer Contributions
Permissible contribution formulas: 3% nonelective contribution on behalf of all eligible
employees, or 100% match on first 1% of compensation deferred, plus
50% match on next 5% – for a total matching contribution of 3½%
Either type of safe-harbor contribution must be fully vested within 2 years
Safe-Harbor contributions are subject to same in-service withdrawal restrictions as QNECs (so not available for financial hardship or before age 59½)
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EACA Advantages
May offer 90-day refund option
May take six months after end of plan year to correct ADP/ACP violation and still avoid 10% excise tax Otherwise, correction required within 2½
months after end of plan year
Not available to “limited EACA”
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EACA Requirements
Must designate which employees are in EACA “Limited EACA” need not include all eligible employees,
but may not utilize six-month correction period May still offer 90-day refund option, so might be suitable
for only new employees (who would not suffer reduction in take-home pay)
Would also allow implementation of EACA during plan year (contrary to general rule)
Must specify uniform auto deferral percentage Unlike QACA, need not be at least 3% of compensation
and need not increase over time However, if increases are specified, must be uniform for
all employees (subject to same exceptions as under QACA)
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EACA Default Investment
PPA required that EACA default investment be QDIA
This requirement repealed by WRERA, for plan years beginning after 2007 May still be prudent to specify QDIA, for
purposes of fiduciary protection
Per Watson Wyatt survey, 90% of large plans use QDIA, rather than stable value or money market fund
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Six-Month Correction Period
Available only if all eligible employees are in EACA (i.e., not a limited EACA)
Still allows for correction via either refunds or QNECs
Timely correction avoids 10% excise tax on excess contributions
Plan may still avoid disqualification by correcting during second six months of following plan year
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90-Day Refund Option
Maximum period for employee to request refund must begin on date of withholding, not deposit into trust
Plan may specify deadline of less than 90 days, so long as employee has at least 30 days to request refund
Plan must refund all deferrals made through date of request, as adjusted for investment gains or losses
Plan may refund limited deferrals made after request, through earlier of 30 days or second pay date after request
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90-Day Refund Option
Refund must be made on same schedule as regular distributions
Tax treatment of refunds: Treated as additional taxable compensation in
year of refund
So not subject to 10% penalty on early withdrawals from retirement plan
But still reported on Form 1099-R, rather than W-2
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Other Auto Deferral Arrangements
Employer may not need QACA or EACA to achieve goal of better participation by NHCEs
Simple auto enrollment arrangement avoids many requirements and restrictions: Need not include all eligible employees Need not specify uniform deferral percentage, either
initially or over time. For example: Some groups might start at 1% deferral percentage, while
others start at 5% Subsequent increases might vary with levels of pay
increases, rather than being uniform Need not provide employer safe-harbor contributions
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Other Auto Deferral Arrangements
Must still provide notice before auto deferrals begin
Must still allow employees to make contrary election (including total opt-out)
Still enjoy ERISA preemption of state wage payment laws
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Notification Requirements
Per IRS regulations, notice provided between 30 and 90 days prior to start of plan year satisfies “reasonable period” requirement
Moreover, if not possible to provide notice before employee becomes eligible, may provide notice after eligibility, so long as: Notice is provided before first pay date Employee has at least a reasonable period of time to
make a contrary election, and If Employee takes no action, automatic deferrals begin by
later of second pay date or 30 days after notice is provided
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Failure to Provide Notice
Failure to provide annual notice may or may not require corrective action Depends on whether facts and
circumstances show that employee was nonetheless aware of auto deferral procedures
Consider such things as oral notice, inclusion in SPD, and receipt of prior annual notices
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Failure to Auto Enroll
Recent IRS newsletter clarifies amount of QNECs required on failure to implement automatic enrollment If proper notice was given, QNECs should be
based on auto enrollment percentage
If no notice was given, QNECs should be based on average deferral percentage of excluded employee’s group (either HCE or NHCE), which may be higher than auto deferral percentage
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Contact Information
Ken Mason
Kenneth Mason
Spencer Fane Britt & Browne [email protected]
Robert Browning
Spencer Fane Britt & Browne [email protected]
Thank You For Your Participation
Kansas City Omaha Overland ParkSt. Louis Jefferson City www.spencerfane.com
www.UBAbenefits.com
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