Pension Protection Act Guide - January 2009 - (Page 16)

Defined Contribution (DC) Plans SpEcIfIc poINtS EffEctIvE DatE currENt Law pENSIoN protEctIoN act what It mEaNS to you automatIc ENroLLmENt Automatic Enrollment ERISA Pre-emption of State Payroll Withholding Laws Immediately Legal questions arose as to the application of state withholding laws to automatic enrollment without employees’ consent. Pre-empts any state law that would prohibit or restrict automatic enrollment. (Initial and annual notice must be given to participants.) Note: Pre-emption only applies to ERISA covered plans. Governmental, non-ERISA 403(b), and non-electing church plans are not provided this protection. • Eases concerns over the legality of 401(k) plan automatic enrollment. • Participant notice content requirements may have changed depending on the type of automatic enrollment arrangement you have implemented. Note: Sample notice language is available to help you with your notice. Automatic Enrollment Permissible Withdrawals for plan years beginning on or after January 1, 2008 There is no statutory basis for making withdrawals of elective deferrals from automatic enrollments in a 401(k), 403(b), or governmental 457(b) plan. Plans with automatic enrollment may allow employees who were late making their deferral elections to elect a withdrawal of their deferrals plus earnings within 90 days after the first default salary deferral contribution of the eligible automatic enrollment arrangement. The withdrawal is taxed in the year of receipt, and is not subject to the 10% early withdrawal penalty. Deferral contributions distributed are not included in the ADP test or in the overall 402(g) deferral limit. In addition, any attributable employer match must be forfeited and is not included in the ADP or ACP test if applicable. (403(b) plans are not subject to ADP testing). • Distributions may now be made to employees who, soon after automatic enrollment, decide not to participate in the plan. Easing of Nondiscrimination Testing Refund Rules with Automatic Enrollment for plan years beginning on or after January 1, 2008 Plans* that do not correct actual deferral percentage (ADP) or actual contribution percentage (ACP) test failures within 2 1⁄2 months after the end of the plan year are subject to a 10% penalty. * ADP testing n/a to 403(b) plans. Refunds to correct ADP/ACP test failures for certain automatic contribution arrangement plans must be made within six months after the end of the plan year to avoid the 10% penalty. • More time to test and make refunds. Qualified Automatic Contribution Arrangement for plan years beginning on or after January 1, 2008 unless a 401(k) Safe harbor plan (ACP Safe harbor plan if 403(b)), plans are subject to ADP and ACP testing. Current Safe harbor rules require 100% vesting in a required employer contribution generally of at least 3% of compensation if a non-elective contribution of at least 4% of compensation if a match contribution. And, eligible employees must receive a written notice of their rights and obligations. Added Qualified Automatic Contribution Arrangement as another alternative method of meeting the nondiscrimination requirements. Plans that follow the Qualified Automatic Contribution Arrangement are: • considered as satisfying the ADF, and potentially, the ACP test. • may be deemed to satisfy the top-heavy rules. The Qualified Automatic Contribution Arrangement requires an automatic deferral feature. The automatic enrollment rate must be between 3% and 10% and must be uniform for all affected employees. If the rate in the initial period is less than 6%, the following minimums apply: • Initial period = 3% • 1st year following initial period = 4% • 2nd year following initial period = 5% • 3rd year following initial period = 6% • This additional Safe Harbor method avoids nondiscrimination testing but without the immediate 100% vesting of the original Safe harbor. • Employers previously reluctant to adopt Safe harbor designs because of immediate vesting may now wish to consider the Qualified Automatic Contribution Arrangement. 16

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Pension Protection Act Guide - January 2009 Contents Multiple Plan Types Defined Benefit (DB) Plans Defined Contribution (DC) Plans Employer Securities Nonqualified Individual Investors

Pension Protection Act Guide - January 2009

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