[Federal Register Volume 72, Number 216 (Thursday, November 8, 2007)]
[Proposed Rules]
[Pages 63144-63155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-21821]
[[Page 63144]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-133300-07]
RIN-1545-BG80
Automatic Contribution Arrangements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations under sections
401(k), 401(m), 402(c), 411(a), 414(w), and 4979(f) of the Internal
Revenue Code relating to automatic contribution arrangements. These
proposed regulations will affect administrators of, employers
maintaining, participants in, and beneficiaries of eligible plans that
include an automatic contribution arrangement under section 401(k)(13),
401(m)(12), or 414(w).
DATES: Written or electronic comments and requests for a public hearing
must be received by February 6, 2008.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-133300-07), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington
DC 20044. Submissions may be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-133300-07),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC 20224 or sent electronically via the Federal
erulemaking Portal at www.regulations.gov (IRS REG-133300-07).
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa
Mojiri-Azad, Dana Barry or William D. Gibbs at (202) 622-6060;
concerning the submission of comments or to request a public hearing,
[email protected], (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP;
Washington, DC 20224. Comments on the collection of information should
be received by January 7, 2008. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in these proposed regulations is in
Sec. Sec. 1.401(k)-3 and 1.414(w)-1. The collection of information in
Sec. 1.401(k)-3 is required to comply with the statutory notice
requirements of 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 that inform
them of their rights and benefits under the plan. The likely
recordkeepers are businesses or other for-profit institutions,
nonprofit institutions, organizations, and state or local governments.
Estimated total average annual recordkeeping burden: 30,000 hours.
Estimated average annual burden hours per recordkeeper: 1 hour.
Estimated number of recordkeepers: 30,000.
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 assigned by the Office of Management and Budget.
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 proposed amendments to regulations under
sections 401(k), 401(m), 402(c), 411(a), and 4979 of the Internal
Revenue Code (Code) and new proposed regulations under section 414(w)
in order to reflect the provisions of section 902 of the Pension
Protection Act of 2006, Public Law 109-280 (PPA '06). 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. These regulations would also amend the comprehensive regulations
under sections 401(k) and 401(m) (published in 2004) and regulations
under section 4979 to reflect other changes made by section 902 of PPA
'06.
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) 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) 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
[[Page 63145]]
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. First, pursuant to section 401(k)(2)(A),
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) 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. Similarly,
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 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 of contributions and meets
certain 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 and
ACP tests.
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 sections 401(k)(2)(B),
403(b)(7), 403(b)(11), or 457(d)(1)(A) for 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 elective
contributions (and attributable earnings) made with respect to the
employee beginning with the first payroll period to which the eligible
automatic contribution arrangement 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 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 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), (3) in the absence of an investment election by the
participant, such contributions are invested in accordance with
regulations prescribed by the Secretary of Labor under section
404(c)(5) of the Employee Retirement Income Security Act of 1974
(ERISA), and (4) participants are provided a notice that satisfies the
requirements of section 414(w)(4).
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 qualified automatic
contribution arrangement.
Section 414(w)(5) defines an applicable employer plan as an
employee's trust described in section 401(a) that is exempt from tax
under section 501(a), a plan described in section 403(b), or a section
457(b) eligible governmental plan.
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 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 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
[[Page 63146]]
excess aggregate contributions under an EACA to 6 months. Thus, in the
case of an EACA, 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 six 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 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 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).
Section 624 of PPA '06 amended section 404(c) of ERISA to provide
that a participant in an individual account plan meeting the notice
requirements of section 404(c)(5)(B) of ERISA is treated as exercising
control over the assets in the account which, in the absence of an
investment election by the participant, are invested in accordance with
regulations prescribed by the Secretary of Labor. The specific timing
and content requirements for the notice required under section
404(c)(5)(B) of ERISA are generally the same as under section
414(w)(4), but the Department of Labor (DOL) has interpretative
jurisdiction for that notice.
Section 902 of PPA '06 also amended section 514 of ERISA to preempt
any State law which would directly or indirectly prohibit or restrict
the inclusion in any plan of an automatic contribution arrangement. The
Secretary of Labor is authorized to prescribe regulations which would
establish minimum standards that such an arrangement would be required
to satisfy in order for this preemption to apply to such an
arrangement. The definition of an automatic contribution arrangement
under section 514 of ERISA is generally the same as the definition of
an EACA under section 414(w)(3), (including the requirement that
automatic contributions under the arrangement must be invested in
accordance with regulations prescribed by the Secretary of Labor under
section 404(c)(5) of ERISA), but the definition does not include a
notice requirement. However, section 514(e)(3) of ERISA requires a
notice to be provided to each participant to whom the arrangement
applies. As in the case for the notice under section 404(c)(5)(B) of
ERISA, the specific timing and content requirements under section
514(e)(3) of ERISA are generally the same as the notice requirements
under section 414(w)(4), but the interpretative jurisdiction for that
notice is also with the DOL.
Explanation of Provisions
1. Qualified Automatic Contribution Arrangement Under Section
401(k)(13)
The proposed regulations would amend Sec. Sec. 1.401(k)-3 and
1.401(m)-3 to reflect the provisions of sections 401(k)(13) and
401(m)(12) for a QACA, the new design-based safe harbor for satisfying
the ADP and ACP tests. To the extent that the requirements to be a QACA
are the same as those for the safe harbor described in sections
401(k)(12) and 401(m)(11), these proposed regulations would apply the
existing rules currently in Sec. Sec. 1.401(k)-3 and 1.401(m)-3 to a
QACA. Thus, for example, because Sec. 1.401(k)-3(e) applies to a QACA,
except to the extent otherwise provided in section 1107 of PPA '06 or
Sec. 1.401(k)-3(f) or Sec. 1.401(k)-3(g), the plan provision
implementing the QACA for an existing qualified CODA would be required
to be adopted before the first day of the plan year and remain in
effect for an entire 12-month plan year. Similarly under Sec.
1.401(k)-3(c)(6), a plan would be permitted to limit the amount of
elective contributions that may be made by an eligible employee under
the QACA, provided that each NHCE who is an eligible employee generally
is permitted to make elective contributions in an amount that is at
least sufficient to receive the maximum amount of matching
contributions available under the plan for the plan year, and the
employee is permitted to elect any lesser amount of elective
contributions.
In order to be a QACA, the plan must provide a specified schedule
of automatic contributions (called qualified percentages) for each
eligible employee beginning with an initial minimum qualified
percentage of 3 percent of compensation. This minimum qualified
percentage begins when the employee first participates in the automatic
contribution arrangement that is intended to be a QACA and ends on the
last day of the following plan year. Thus, this initial period for a
participant could last as long as two full plan years. After this
initial period, the minimum qualified percentage increases by 1 percent
for each of the next three plan years. Thus, the minimum qualified
percentage for the plan year after the initial period is 4 percent.
This minimum qualified percentage increases to 5 percent for the next
plan year, and then is 6 percent for all plan years thereafter. These
are merely minimum qualified percentages. Thus, a QACA can provide for
higher percentages. For example, a QACA could provide for a qualified
percentage in the initial period of 4 percent of compensation. If a
plan did so, it could also provide a 4 percent qualified percentage for
the plan year after the initial period (the statutory minimum
percentage for that plan year), 5 percent in the next plan year and 6
percent thereafter. However, the qualified percentage can at no time
exceed 10 percent of compensation.
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.
Further, the proposed regulations would provide that a cash or deferred
arrangement does not fail to satisfy the uniformity requirement merely
because an employee is not automatically enrolled during a period that
the employee is not permitted to make elective contributions because of
the requirement to suspend elective contributions for a 6-month period
following a hardship distribution. In the case of an employee whose
elective contributions have been suspended (for example, because of a
hardship distribution), the plan must provide that the employee will,
at the end of the suspension period, resume elective contributions at
the level (percentage) that would apply if the suspension had not
occurred.
Reflecting section 401(k)(13)(C)(ii), the proposed regulations
provide that the default election ceases to apply to any eligible
employee if the employee makes an affirmative election that remains in
effect to not have any elective contributions made on his or her behalf
or to have elective
[[Page 63147]]
contributions made in a specified amount or percentage of compensation
on his or her behalf. Thus, an employee can make an affirmative
election to contribute at a certain level and have that election apply
for all subsequent plan years. Similarly, an employee can make an
affirmative election to have no elective contributions made on his or
her behalf. This latter election is not the same as the election to
withdraw prior elective contributions under section 414(w).
The proposed regulations also reflect section 401(k)(13)(C)(iv),
which provides an exception from the default election for eligible
employees who were eligible to participate in the CODA (or a
predecessor CODA) immediately before the effective date of the QACA and
who have an election in effect on that effective date. The proposed
regulations would provide that an election in effect means an
affirmative election that remains in effect to have the employer make
elective contributions on his or her behalf (in a specified amount or
percentage of compensation) or to not have the employer make elective
contributions on his or her behalf. Generally, this would require that
the employee have completed an election form and chosen an amount or
percentage (including zero) of his compensation to be deferred.
The proposed regulations reflect the matching or nonelective
contribution requirement of section 401(k)(13)(D). As with the safe
harbor in section 401(k)(12), section 401(k)(13) provides a choice for
an employer between satisfying a matching contribution requirement or a
nonelective contribution requirement. However, while the QACA requires
the same level of employer nonelective contributions as under section
401(k)(12), the matching contribution requirement for a QACA allows for
a lower level of matching contributions. Specifically, a QACA using the
matching contribution alternative need only provide for matching
contributions on behalf of each eligible NHCE equal to 100 percent of
the employee's elective contributions that do not exceed one percent of
compensation and 50 percent of the employee's elective contributions
that exceed one percent but do not exceed six percent of compensation.
In addition, a QACA allows a slower schedule of vesting for both
matching and nonelective safe harbor contributions than the safe harbor
in section 401(k)(12). All QACA safe harbor contributions must be fully
vested after 2 years of vesting service (within the meaning of section
411(a)), rather than immediately as required by section 401(k)(12). In
addition, the proposed regulations would apply the same distribution
restrictions that apply to safe harbor contributions and nonelective
contributions under section 401(k)(12) to QACA safe harbor
contributions.
Each eligible employee under a QACA must receive a safe harbor
notice within a reasonable period before each plan year. The proposed
regulations reflect the requirement that this notice must provide the
information required under section 401(k)(12). The regulations also
reflect the additional timing and content requirements described in
section 401(k)(13)(E)(i). Thus, the notice must also explain: (1) 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
contributions made in a different amount or percentage of compensation;
and (2) how contributions made under the automatic contribution
arrangement will be invested in the absence of any investment decision
by the employee (including, in the case of an arrangement under which
the employee may elect among two 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).
These additional requirements cannot be satisfied by reference to the
plan's summary plan description. Further, the proposed regulations
would provide that in order to satisfy section 401(k)(13)(E)(ii)(III),
under the QACA, the employee must be given a reasonable period of time
after receipt of the notice and before the first elective contribution
is to be made to make an election with respect to contributions and
investments.
The proposed regulations interpret the requirement under section
401(k)(13)(E)(i) to provide a notice within a reasonable period before
each plan year by applying the rules of Sec. 1.401(k)-3(d)(3). Thus,
the proposed regulations would provide that the general determination
of whether the timing requirement is satisfied is based on all of the
relevant facts and circumstances, and the deemed timing rule of Sec.
1.401(k)-3(d)(3)(ii) applies. Under this deemed timing rule, the timing
requirement 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
eligible employee for the plan year. The proposed regulations would
also provide that 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 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).
Thus, for example, the preceding sentence would apply to all eligible
employees for the first plan year under a newly established plan that
provides for elective contributions, and to the first plan year in
which an employee becomes eligible under an existing plan that provides
for elective contributions. In the case of a plan with immediate
eligibility when an employee is hired, this deemed timing rule would be
satisfied if the employee is provided the notice on the first day of
employment.
2. Eligible Automatic Contribution Arrangement Under Section 414(w)
In order to further facilitate automatic enrollment, section 414(w)
provides limited relief from the distribution restrictions under
sections 401(k)(2), 403(b)(7), 403(b)(11), and 457(d) (as well as
certain other relief provisions) for an applicable plan (that is, a
section 401(k) plan, a section 403(b) plan, or a section 457(b)
eligible governmental plan) with an EACA. Specifically, section
414(w)(2) provides that, under an applicable employer plan with an
EACA, an employee can be permitted to elect to receive a distribution
equal to the amount of default elective contributions (and attributable
earnings) made with respect to the first payroll period to which the
EACA applies to the employee and any succeeding payroll periods
beginning before the effective date of the election.
An employer is permitted, but not required, to include the section
414(w)(2) permissible withdrawal provision in an applicable employer
plan, and an employer who does offer this option is not required to
make it available to all employees eligible under the EACA. Thus, for
example, an employer might choose to make the withdrawal option
available only to employees for whom no elective contributions have
been made under the CODA (or a predecessor CODA) before the EACA is
effective. However, under a section 401(k) plan or a section 403(b)
plan, the employer may not condition the right to take the withdrawal
on the employee making an election to have no future elective
contributions made on the employee's behalf because such a condition
would violate the contingent benefit rule under section 401(k)(4)(A) or
the universal availability requirement under section 403(b)(12)(A)(ii).
[[Page 63148]]
Nonetheless, the employer could provide in the withdrawal election form
a default election under which elective contributions would cease
unless the employee makes an affirmative election.
Under section 414(w)(2)(B), the election to withdraw the
contributions that were made under an EACA must be made within 90 days
of the ``first elective contribution with respect to the employee under
the arrangement.'' The proposed regulations would define the
arrangement for this purpose as the EACA so that the withdrawal option
could apply to employees previously eligible under the CODA (including
a CODA that is an automatic contribution arrangement but was not an
EACA). Because section 414(w) only applies to plan years beginning on
or after January 1, 2008, an automatic contribution arrangement can
only become an EACA on or after that date. Accordingly, a withdrawal
election under section 414(w) can only apply to elective contributions
made after that date. The proposed regulations would provide that the
90-day window for making the withdrawal election begins on the date on
which the compensation that is subject to the cash or deferred election
would otherwise have been included in gross income. In addition, the
proposed regulations would provide that the effective date of the
election must be no later than the last day of the payroll period that
begins after the date of the election.
The proposed regulations would provide that the distribution is
generally the account balance attributable to the default elective
contributions, adjusted for gains and losses. The distribution may be
reduced by any generally applicable fees. However, the proposed
regulations provide that the plan may not charge a different fee for
this distribution than would apply to other distributions. Also, if the
default elective contributions are not maintained in a separate
account, 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.
The amount withdrawn under section 414(w) is includible in gross
income in the year in which it is distributed, except amounts that are
distributions of designated Roth contributions are not included in an
employee's gross income a second time. The proposed regulations would
require that this amount be reported on Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc. However, the amount is not subject to the
additional income tax under section 72(t). Finally, the proposed
regulations would amend Sec. 1.402(c)-2 to include these withdrawals
in the list of distributions that are not eligible for rollover.
Any 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.
Under section 414(w)(3)(B), an EACA must provide that the default
elective contribution is a uniform percentage of compensation. The
proposed regulations would provide that the permitted differences in
contribution rates provided in these proposed regulations under section
401(k)(13) for a QACA also apply to an EACA.
Another requirement to be an EACA under section 414(w)(3)(C) is
that automatic contributions are invested in accordance with
regulations prescribed by the Secretary of Labor under section
404(c)(5) of ERISA. These proposed regulations would provide that this
requirement only applies if the plan is otherwise subject to Title I of
ERISA. Thus, for example, this provision would not apply to a
governmental plan (within the meaning of section 414(d)).
The proposed regulations reflect the section 414(w) notice
requirement under which notice must be provided to each employee to
whom the EACA applies within a ``reasonable period'' before each plan
year, but provide that, if an employee becomes eligible in a given
year, notice must be given within a ``reasonable period'' before the
employee becomes eligible. The proposed regulations provide a deemed
timing requirement that is generally the same as the deemed timing rule
in Sec. 1.401(k)-3(d)(3)(ii).
3. Coordinated Notices
As noted in this preamble, PPA '06 provides for several notices
relating to automatic contribution arrangements that have similar
content and timing requirements, including the notices required by
sections 404(c)(5)(B) and 514(e)(3) of ERISA. The IRS, in coordination
with DOL, anticipates that a single document can satisfy all of these
notice requirements, so long as it has all of the requisite information
for plan participants and satisfies the timing requirements for each of
those notices.
4. Other Provisions of Section 902 of PPA '06
The proposed regulations also reflect the amendments to section
4979 made by section 902 of PPA '06. First, the proposed regulations
reflect the substitution of 6 months for 2\1/2\ months as the time
period under section 4979(f) by which excess contributions or excess
aggregate contributions with respect to an EACA must be distributed to
avoid the excise tax under section 4979(a). Further, the proposed
regulations reflect the elimination of the requirement that
distributions of excess contributions or excess aggregate contributions
(whether or not under an EACA) include attributable earnings for the
period after the end of the plan year (gap period income). The proposed
regulations also reflect the change in the tax treatment of a
distribution of excess contributions or excess aggregate contributions
(whether or not under an EACA) under which the distribution of excess
contributions or excess aggregate contributions (including earnings) is
includible in the participant's gross income for the year of the
distribution (without regard to the amount of the distribution). The
proposed regulations would also amend Sec. Sec. 1.401(k)-2 and
1.401(m)-2 to reflect these provisions in the correction rules for the
ADP and ACP tests. All of these changes are proposed to be effective
January 1, 2008 and will impact corrective distributions made in 2009.
In addition, the proposed regulations would amend Sec. Sec.
1.401(k)-2 and 1.401(m)-2 to reflect the provisions of section
414(w)(6) that default elective contributions distributed under section
414(w) are not taken into account in the ADP test. They are also not
permitted to be taken into account in the ACP test. The proposed
regulations under section 401(m) have added a conforming change for
other elective contributions that are not taken into account in the ADP
test. The proposed regulations would also amend Sec. 1.411(a)-4(b)(7)
to reflect the amendment to section 411(a)(3)(G) made by PPA '06
section 902(d)(2).
Effective Date
Sections 401(k)(13), 401(m)(12), and 414(w), and the amended
provisions of sections 411(a)(3)(G) and 4979(f), are effective for plan
years beginning on or after January 1, 2008. These regulations are
proposed to be effective for plan years beginning on or after January
1, 2008. Taxpayers may rely on these proposed regulations for guidance
[[Page 63149]]
pending the issuance of final regulations. If, and to the extent, the
final regulations are more restrictive than the guidance in these
proposed regulations, those provisions of the final regulations will be
applied without retroactive effect.
Special Analyses
It has been determined that this notice of proposed rulemaking is
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 proposed
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, these regulations have been submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comments
on its impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (one signed and eight (8)
copies) or electronic comments that are submitted timely to the IRS.
The IRS and Treasury Department specifically request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying. A public hearing will be scheduled if requested in writing by
any person who timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place of the public hearing
will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Dana Barry, William
Gibbs, and 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 in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended to read
as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.401(k)-3 is also issued under 26 U.S.C. 401(k)(13)
Par. 2. Section 1.401(k)-0 is amended by:
1. Amending the entry for Sec. 1.401(k)-2 by adding entries for
Sec. Sec. 1.401(k)-2(a)(5)(vi) and 1.401(k)-2(b)(2)(iv)(D).
2. Revising the entries for Sec. Sec. 1.401(k)-2(b)(2)(vi)(A) and
1.401(k)-2(b)(2)(vi)(B).
3. Adding an entry for Sec. 1.401(k)-2(b)(5)(iii).
4. Revising the entries for Sec. Sec. 1.401(k)-3(a)(1), 1.401(k)-
3(a)(2) and 1.401(k)-3(a)(3).
5. Adding entries for Sec. Sec. 1.401(k)-3(i), 1.401(k)-3(j)
through (j)(2)(iii).
6. Adding entries for Sec. 1.401(k)-3(k) through (k)(4)(iii).
The additions and revisions to 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 for certain current employees.
(2) Qualified percentage.
(i) In general.
(ii) Minimum percentage requirements.
(A) Initial-year requirement.
(B) Second-year requirement.
(C) Third-year requirement.
(D) Later years requirement.
(iii) Exception to uniform percentage requirement.
(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.
Par. 3. Section 1.401(k)-1 is amended by:
1. Revising paragraph (b)(1)(ii)(C) and adding new paragraph
(b)(1)(ii)(D).
2. Revising paragraph (e)(7) by adding a new sentence after the
fifth sentence.
The additions and revisions 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
[[Page 63150]]
if the requirements for the safe harbor are not satisfied. * * *
* * * * *
Par. 4. Section 1.401(k)-2 is amended by:
1. Adding paragraph (a)(5)(vi).
2. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
3. Removing paragraph (b)(2)(iv)(E).
4. Revising paragraph (b)(2)(vi)(A).
5. Adding a new first sentence to paragraph (b)(2)(vi)(B).
6. Removing and reserving Example (3), Example (4), and Example (5)
from Sec. 1.401(k)-2 (b)(2)(viii).
7. Revising paragraph (b)(4)(iii) and adding paragraph (b)(5)(iii).
The additions and revisions 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 also 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 a plan that includes 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 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 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.
* * * * *
Par. 5. Section 1.401(k)-3 is amended by:
1. Revising paragraph (a).
2. Revising the first sentence of paragraph (e)(1).
3. Revising the last sentence of paragraph (h)(2).
4. Revising the first sentence of paragraph (h)(3).
5. Reserving paragraph (i) and adding paragraphs (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 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, respectively.
* * * * *
(e) * * * (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
[[Page 63151]]
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.
(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 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 ceases to apply with respect to an eligible employee if the
employee makes an affirmative election (that remains 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 for certain current employees. An automatic
contribution arrangement will not fail to be a qualified automatic
contribution arrangement merely because the default 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
period that begins when the employee first participates in the
automatic contribution arrangement that is a qualified automatic
contribution arrangement and ends on the last day of the following plan
year is at least 3 percent.
(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 an eligible
employee has participated in the automatic contribution arrangement
intended to be a qualified automatic contribution arrangement;
(B) 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 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)-1(d)(3)(iv)(E)(2).
(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 described in paragraph (j) of this section
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 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.
(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
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--
[[Page 63152]]
(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).
(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 and before the first elective contribution
is made under the arrangement to make the elections described under
paragraph (k)(4)(ii)(B) and (C) of this section.
* * * * *
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, excess
aggregate contribution, or it is forfeitable under Sec. 1.414(w)-
1(d)(2).
* * * * *
Par. 7. Section 1.401(m)-0 is amended to read as follows:
Adding an entry for Sec. 1.401(m)-2(b)(4)(iii).
Sec. 1.401(m)-0 Table of Contents.
* * * * *
Sec. 1.401(m)-2 ACP Test.
* * * * *
(b) * * *
(2) * * *
(iv) * * *
(A) * * *
(D) Plan years before 2008.
* * * * *
(4) * * *
(iii) Special rule for eligible automatic contribution
arrangements.
* * * * *
Par. 8. Section 1.401(m)-1 is amended by:
1. Revising paragraph (b)(1)(iii) and adding paragraph (b)(1)(iv).
2. Revising the last sentence of paragraph (b)(4)(iii)(B).
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.
* * * * *
(b) * * *
(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. * * *
* * * * *
Par. 9. Section 1.401(m)-2 is amended by:
1. Revising the first and second sentences of paragraph (a)(5)(iv).
2. Revising paragraph (a)(5)(v).
3. Adding a new sentence to the end of paragraph (a)(6)(ii).
4. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
5. Removing paragraph (b)(2)(iv)(E).
6. Revising paragraph (b)(2)(vi)(A).
7. Adding a new sentence to the beginning of paragraph
(b)(2)(vi)(B).
8. Adding paragraph (b)(4)(iii).
The additions and revisions to 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
(3.5 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 a 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)-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,
[[Page 63153]]
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 a
plan that includes 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 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.
* * * * *
Par. 10. Section 1.401(m)-3 is amended by:
1. Revising paragraph (a).
2. Revising the first sentences of paragraphs (f)(1) and (j)(3).
The additions and revisions to 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 a qualified 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. * * *
* * * * *
Par. 11. Section 1.402(c)-2, A-4 is amended by redesignating
paragraph (i) as (j) and adding a new paragraph (i) to read as follows:
Sec. 1.402(c)-2 Eligible rollover distributions, questions and
answers.
* * * * *
A-4 * * *
(i) A distribution that is a permissible withdrawal from an
eligible automatic contribution arrangement within the meaning of
section 414(w).
* * * * *
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.
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 default elective
contributions (within the meaning of Sec. 1.414(w)-1(e)) that are
withdrawn in accordance with the requirements of Sec. 1.414(w)-1(c).
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 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
[[Page 63154]]
an automatic contribution arrangement under an applicable employer plan
that, for the plan year, satisfies the uniformity requirement under
paragraph (b)(2) of this section, the notice requirement under
paragraph (b)(3) of this section, and the default investment
requirement under (b)(4) of this section.
(2) Uniformity requirement. An eligible automatic contribution
arrangement must provide that the default elective contribution is a
uniform percentage of compensation. An arrangement does not violate the
uniformity requirement of this paragraph (b)(2) merely because the
percentage varies in a manner that is permitted under Sec. 1.401(k)-
3(j)(2)(iii), except that the rules of Sec. Sec. 1.401(k)-
3(j)(2)(iii)(A) and 1.401(k)-3(j)(2)(iii)(B) are applied without regard
to whether the arrangement is intended to be a qualified automatic
contribution arrangement.
(3) Notice requirement--(i) General rule. The notice requirement of
this paragraph (b)(3) is satisfied for a plan year if each eligible
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 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 amount of elective
contributions 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
year an employee becomes an eligible employee, within a reasonable
period before the employee becomes an eligible 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 and before
the first elective contribution is made under the arrangement to make
the election described under paragraph (b)(ii)(A) 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 eligible employee 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 an
eligible employee 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 an eligible
employee (and no later than the date the employee becomes an eligible
employee).
(4) Default investment requirement. To the extent the plan is
subject to Title I of ERISA, default elective contributions under an
eligible automatic contribution arrangement must be invested in
accordance with regulations prescribed by the Secretary of Labor under
section 404(c)(5) of ERISA.
(c) Permissible withdrawal--(1) In general. If the plan provides,
any 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 sections 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. The 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. 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. The
effective date of an election described in this paragraph (c)(2) cannot
be later than the last day of the payroll period that begins after the
date the election is made.
(3) Amount 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 different fee for a distribution
under section 414(w) than applies to other 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, the 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
withdrawal 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.
(2) Forfeiture of matching contributions. In the case of any
withdrawal made under paragraph (c) of
[[Page 63155]]
this section, employer matching contributions with respect to the
amount withdrawn must be forfeited.
(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); or
(iii) Is a section 457(b) eligible governmental plan described in
Sec. 1.457-2(f).
(2) Automatic contribution arrangement. An automatic contribution
arrangement means an arrangement that provides for a cash or deferred
election 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 elected to have default elective
contributions made on his or her behalf under the plan. This default
election ceases to apply with respect to an employee if the employee
makes an affirmative election (that remains in effect) to--
(i) Not have any default elective contributions made on his or her
behalf; or
(ii) Have default elective contributions made in a different amount
or percentage of compensation.
(3) Default elective contributions. Default elective contributions
means contributions made at a specified level or amount under an
automatic contribution arrangement that are--
(i) Contributions described in section 402(g)(3)(A) or
402(g)(3)(C); or
(ii) Contributions made pursuant to a cash or deferred election
within the meaning of section 457(b)(4) where the contributions are
under a section 457(b) eligible governmental plan.
(4) Eligible employee. An eligible employee means an employee who
is eligible to make a cash or deferred election under the plan.
(f) Effective date. Section 414(w) and this section apply to plan
years beginning on or after January 1, 2008.
* * * * *
PART 54--EXCISE TAXES. PENSIONS, REPORTING AND RECORDKEEPING
REQUIREMENTS
Par. 14. The authority citation for part 54 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 15. Section 54.4979-1(c)(1) is amended by:
Revising the first and second sentences of paragraph (c)(1) 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 of 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)).
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 period (6 months in the case of a plan that
includes an eligible automatic contribution arrangement within the
meaning of section 414(w)). * * *
* * * * *
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-21821 Filed 11-7-07; 8:45 am]
BILLING CODE 4830-01-P