Treasury, IRS Issue Guidance On Pension Protection Act

by Mike Godfrey, Tax-News.com, Washington

09 November 2007

The US Treasury Department and the Internal Revenue Service (IRS) recently issued proposed regulations implementing new rules that facilitate the adoption of automatic contributions arrangements in 401(k) plans and other similar plans under sections 403(b) and 457 of the Internal Revenue Code. These regulations provide answers for employers that will allow them to use these new automatic enrollment features next year. Employers may rely on these proposed rules pending the issuance of final regulations, according to the Treasury.

Employers that offer 401(k) plans must specify what contributions, if any, will apply to employees covered under the plan who do not make a specific election to contribute. Historically, most employers designed their plans to treat an employee who takes no action as if the employee elected to make no contributions.

There has been a new trend, however, to change this practice. Under these new arrangements, called automatic contribution arrangements, the default is switched and employees who take no action are automatically enrolled in the 401(k) plan at a specified percentage.

Last year's Pension Protection Act included a number of provisions to make it easier to adopt these automatic contribution arrangements. The Department of Labor has released regulations that addressed the investment issues that relate to automatic contribution arrangements.

The proposed regulations released by Treasury and the IRS address issues raised by the new legislation, including the special nondiscrimination safe harbor for certain qualified automatic contribution arrangements, and the ability of an employee who has been automatically enrolled under an eligible automatic contribution arrangement to opt-out of the arrangement and instead request a distribution of the contributions made during the first 90 days of the arrangement.

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