While the Internal Revenue Service has decided to keep the limit of total employee contributions to 401(k) plans at $15,500 for traditional plans and $10,500 for SIMPLE plans for 2008, the agency has proposed rules changes to the optional safe harbor 401(k) plans that provide for automatic enrollment, CCH reports. The proposed rules changes to Qualified Automatic Contribution Arrangements (QACAs), which are effective for plan years beginning on or after January 1, 2008, affect employee contributions, vesting and withdrawals and annual notice.
Safe harbor plans, whether traditional 401(k)s or plans with automatic enrollment features, do not have to run an IRS non-discrimination test to determine whether average salary deferrals of higher-paid employees exceed average deferrals of other employees, if they qualify for one of two safe harbors, Financial Week reports.
Under one option for a safe harbor plan, the employer must match each eligible employee's contribution, dollar-for-dollar, up to 3 percent of the employee's compensation, and 50 cents on the dollar for the employee's contribution on the next 2 percent of compensation.
The second safe harbor option requires employers to make a nonelective contribution of 3 percent of compensation to eligible employees' accounts.
The employer must make either the matching contributions or the nonelective contributions each year.
Traditional safe harbor plans offer immediate vesting but under the proposed rules for QACAs employees do not vest in the matching contributions for two years.
In addition, under the proposed rules for QACAs, employee contribution percentages are more detailed. According to a CCH analysis, the qualified contribution percentage must be equal to at least 3 percent of compensation during the first year of the employee's automatic enrollment, increase to 4 percent in the second year, 5 percent in the third year and 6 percent in the fourth year and thereafter.
Other proposed changes include:
- The initial period for an employee can last for two years.
- The qualifying percentage must be applied uniformly
- Employees who have opted out of current plans are not eligible under QACA
- Employers may limit participation to employees hired after the effective date
Under safe harbor rules for all plans, each eligible employee must receive a notice of his rights and obligations under the plan. Proposed rules for QACAs dictate that the notice must disclose the level of elective default contribution, if the employee does not respond to the notice. The notice must also disclose how the contributions will be invested. Final rules on how default contributions are to be invested have been issued by the Department of Labor and will take effect on December 24, 2007, CCH reports.
A 90-day window for withdrawal of contributions is allowed when the employee decides to opt out, and more detailed rules for charges to the withdrawals for investment fees and gains and losses are also among the proposed rules for QACAs.
You can read the CCH analysis of the proposed rules.