CASE OF THE WEEK – Automatic Contribution Arrangement (ACA) Plan Entry Requirements

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Wisconsin addressed a question on automatic contribution arrangement (ACA).  The advisor asked: “My client’s 401(k) plan is an ACA with immediate plan eligibility. How can the notice and plan entry requirements for this plan be satisfied?”

Highlights of the Discussion

The notice requirements for an ACA are that an eligible employee have an “effective opportunity” to make or change an election at least once during each plan year under Treas. Reg. Section 1.401(k)-1(e)(2)(ii). Effective opportunity is based on a “facts and circumstances” test.  Consequently, determining effective opportunity when a plan has immediate eligibility can be tricky.

According to IRS Revenue Ruling 2000-8, an effective opportunity occurs if the employee receives notice of the availability of the election and the employee has a “reasonable” period before the cash is currently available to make the election.  Here again, reasonable, is based on facts and circumstances. For a plan that provides for immediate entry—the notice will still be considered timely, provided the employer gives it as soon as possible after the employee’s eligibility date, and the employee may elect to defer on any compensation earned beginning on the date he or she becomes eligible. But be aware of plan document provisions that may address notice and deferral timing and/or recordkeeping platforms that may impose a “30-90 days prior” timing requirement.

IRS Notice 2009-65 contains sample plan document language that can be used for adding automatic enrollment to plans.  The notice specifies, “At least 30 days, but not more than 90 days, before the beginning of the Plan Year, the Employer will provide each Covered Employee a comprehensive notice …”  An IRS Issue Snapshot points out that “… 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[1] nor an EACA[2]. 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.”

Further, some recordkeeping systems will not allow a new plan participant to be added until after 30 days from date of hire as that is their set internal process tied to the safe harbor for notice distribution.

Conclusion

Under an ACA, an eligible employee must receive notice of the availability of the deferral election and be given a reasonable period before the cash is currently available to make the election. A reasonable period is based on facts and circumstances, but be sure to check the plan document for specific language or recordkeeper internal processes that may affect the timing.

[1] Qualified Automatic Contribution Arrangement

[2] Eligible Automatic Contribution Arrangement

Pattern

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