If the plan contains an eligible automatic contribution arrangement, it may allow an employee to withdraw automatic enrollment contributions. The employee must make a withdrawal election within the time stated in the plan (no less than 30 days or more than 90 days from when the employee first had any automatic enrollment contributions deducted). An employee’s election to withdraw his or her automatic enrollment contributions becomes effective no later than the earlier of the:
- pay date for the second payroll period after the election, or
- first pay date at least 30 days after the employee’s election.
An employee who elects to withdraw automatic enrollment contributions forfeits any matching employer contributions that would have been made with respect to the automatic enrollment contributions. The forfeited amounts are not refunded to the employer and must be treated the same as other forfeitures under the terms of the plan. The plan may state that matching contributions do not have to be made for automatic enrollment contributions that are withdrawn prior to the date that the plan otherwise allocates the matching contributions. The plan must use its ordinary procedures when processing distributions of automatic enrollment contributions and not charge higher fees than those charged for other distributions.
Any pre-tax automatic enrollment contributions that an employee withdraws are taxable income to the employee in the year in which they are distributed. The withdrawn amount is not subject to the additional 10% tax that normally applies to early distributions from retirement plans.
An employer cannot condition an employee’s withdrawal of automatic enrollment contributions on the employee’s not making future contributions. The employee can always choose to make future contributions to the plan by submitting a new election form to the employer.