This Snapshot discusses the general notice requirements for automatic contribution arrangements (ACA) in 401(k) plans that are neither a qualified automatic contribution arrangement (QACA) nor an eligible automatic contribution arrangement (EACA). A 401(k) plan with an ACA generally is a cash or deferred arrangement (CODA) that provides for automatic elective contributions in the absence of a specific affirmative election by a participant. QACAs and EACAs are subject to detailed annual participant notice requirements that are set forth in the Code and regulations. In contrast, whether the notice under an ACA is adequate is generally based on the facts and circumstances.
IRC Sections and Treas. Regulations
- IRC Section 401(k)
- IRC Section 401(m)
- IRC Section 414(w)
- Reg. Section 1.401(k)-1
- Reg. Section 1.401(k)-3
- Reg. Section 1.414(w)-1
Notice 2009-65, 2009-39 I.R.B. 413
Preamble to Treasury Decision 9169, Final Regulations under IRC Sections 401(k) and 401(m), December 29, 2004
2015 Winter CPE, Automatic Contribution Arrangements
Automatic Contribution Arrangements – Background
A 401(k) plan may include an ACA feature that provides for automatic elective contributions at a default level, in the absence of an affirmative election by a participant, if applicable requirements are met. Examples of allowable ACAs were described in guidance issued before QACAs and EACAs were enacted. See Rev. Rul. 98-30, 1998-1 C.B. 1273, later amplified and superseded by Rev. Rul. 2000-8, 2000-1 C.B. 617. Rev. Rul. 2000-8 was incorporated with modifications into the final Section 401(k) regulations issued December 29, 2004. See the Preamble to Treasury Decision 9169, Final Regulations under IRC Sections 401(k) and 401(m), December 29, 2004.
Section 902 of the Pension Protection Act of 2006, P. L. 109-280 (PPA ‘06), created QACAs and EACAs. A QACA is an ACA that satisfies the “safe harbor” provisions under IRC Sections 401(k)(13) and/or 401(m)(12), generally exempting the plan from actual deferral percentage (ADP) and/or actual contribution percentage (ACP) testing. An EACA is an ACA that satisfies IRC Section 414(w) by requiring default contributions based on a uniform percentage of compensation until the participant elects otherwise. Special compliance requirements apply to both types of arrangements, including specific rules requiring annual notice to participants of their rights and contribution levels under the plan. The preamble to the 2009 final regulations on automatic contribution arrangement ACAs, which addresses the PPA ’06 QACA and EACA changes, specifically notes that many employers previously adopted ACAs as described in prior guidance and that the 2009 regulations do not affect any ACA that is not intended to be a QACA or an EACA.
Reg. Section 1.401(k)-1(e)(2)(ii) requires that all 401(k) plan participants be given an “effective opportunity” to make or change a cash or deferred election at least once during each plan year. “Whether an employee has this effective opportunity is determined based on all the relevant facts and circumstances, including the adequacy of notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.” Reg. Section 1.401(k)-1(e)(2)(ii).
QACAs and EACAs
A 401(k) plan with a QACA or EACA is subject to the general CODA requirements, such as the effective opportunity standard, but also must comply with specific notice requirements on content and timing. See Reg. Sections 1.401(k)-3(k)(4) and 1.414(w)-1(b)(3). A full discussion of the notice requirements for QACAs and EACAs is beyond the scope of this Snapshot.
ACAs that are neither QACAs nor EACAs
An ACA that is neither a QACA nor an EACA is subject to the general CODA requirements, including the requirement that an employee must have an “effective opportunity” to make or change an election at least once during each plan year, as set forth in Reg. Section 1.401(k)-1(e)(2)(ii). Whether there is an effective opportunity is based on the facts and circumstances, including the adequacy of the employee notice. Under the examples in Rev. Rul. 2000-8 (which superseded Rev. Rul. 98-30), the automatic enrollment plans followed detailed annual notice procedures. Note that those revenue rulings interpreted prior regulations which did not include the effective opportunity language in the current regulation.
In addition, if the plan document has specific language describing annual notice and election requirements, compliance in operation is required. For example, Notice 2009-65, 2009-39 I.R.B. 413, includes sample language for an ACA plan that is neither a QACA nor an EACA. The sample language includes a mandatory annual notice to participants that must be distributed at least 30 days but not more than 90 days before the beginning of a plan year. It is common for plans to adopt the IRS’ sample plan language.
Contact Chief Counsel: TEGE Division Counsel with any questions about whether the effective opportunity requirement has been met.
- Review the plan document, adoption agreement and all amendments to determine if the plan has specific language that requires an annual notice to participants. If so, request a sample of the notice and confirm that it was issued pursuant to the terms of the plan.
- If the plan has such language, determine whether it provides an effective opportunity to make or change a cash or deferred election at least once during each plan year, including the adequacy of the notice that elections are available, the period of time during which an election may be made, and any other conditions on elections.
- If there is no specific language in the plan requiring an annual notice, request a copy of the plan’s administrative procedures for participant notice and elections for automatic enrollment. Confirm the following:
- How do participants know that they can change their elections on an annual basis?
- During what period can an election be made?
- Are there other conditions on elections?
- Do participants receive any notification? If so, ask for a sample.
- How often is notice given?
- How is notice distributed?
- Contact Chief Counsel: TEGE Division Counsel with any questions.
- Retirement Topics - Automatic Enrollment
- Retirement Plan FAQs regarding Automatic Contribution Arrangements (Automatic Enrollment)
- 401(k) Plans