Proposed Regulations Encourage Automatic 401(k) Contributions

The Pension Protection Act of 2006 (PPA) provided several changes to current 401(k) rules. Perhaps
the most beneficial is the automatic enrollment feature. Effective for plan years beginning on or after January
1, 2008, employees are automatically enrolled in the employer’s 401(k), 403(b) or 457 plans unless they opt
out. The PPA preempts many states’ laws that preclude automatic enrollment.
Proposed regulations also include a designed-based safe harbor for qualified automatic contribution
arrangements (QACA). Plan arrangements that qualify as QACA will be considered to have satisfied the
actual deferral percentage and actual contribution tests that otherwise apply to employee elective deferrals
and employer matching contributions. Generally, these plans will be exempt from the top-heavy rules, which
prevent owners and other key employees from disproportionately benefiting from the plan. Employers with a
QACA can choose to provide matching or non-elective contributions. Employees fully vest in any employer
contribution after only two years of service.

Each qualified employee under a QACA must receive a safe harbor notice “within a reasonable period
before each plan year” that explains:
• the employee’s right to elect not to have elective contributions made on their behalf, or to elect to
have contributions made at a different percentage or amount
• how automatic contributions made will be invested without any employee investment decisions

The proposed regulations also provide that a plan participant may withdraw certain default elective
deferrals within 90 days of the first deferral to the eligible automatic contribution arrangement without the
distribution being subject to the normal 10% early withdrawal tax, another great feature.
If you have questions, please contact your HLB Gross Collins, P.C. advisor.

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