IRS Tax: IRS releases flurry of employee benefits guidance

The Internal Revenue Service on September 4 released three revenue rulings and four notices on employee benefits issues including automatic enrollment to section 401(k) plans and SIMPLE IRAs, paid time-off contributions, automatic contribution increases under automatic contribution arrangements, and eligible rollover distributions.


Automatic enrollment to section 401(k) plans and SIMPLE IRAs

Notice 2009-65 provides two sample plan amendments for sponsors, practitioners, and employers who want to amend to their section 401(k) plans, either to add an automatic contribution arrangement or to add an eligible automatic contribution arrangement described in section 414(w) (permitting 90-day withdrawals). Plan sponsors may adopt the sample amendments verbatim, or, in appropriate cases, modify the sample language provided.

Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, permitting SIMPLE IRA plans to have an automatic enrollment arrangement and addressing certain other questions related to the inclusion of an automatic contribution arrangement. Notice 2009-67 provides a sample plan amendment that a prototype sponsor of a SIMPLE IRA plan (using a designated financial institution) can use in drafting an amendment to add an automatic contribution arrangement.


Paid time-off contributions

Rev. Rul. 2009-31 provides guidance with respect to annual paid time-off contributions. The IRS ruled that amendments to plans allowing such contributions are permitted, and that the contributions can be made either automatically by the employer or at the election of the employee.

With respect to paid time-off contributions at termination of employment, the IRS ruled in Rev. Rul. 2009-32 that under several factual scenarios a participant does not include in gross income (1) contributions to a profit-sharing plan of the dollar equivalent of unused paid time off, in accordance with section 402(a), until distributions are made to the participant from the plan and (2) an amount paid for the dollar equivalent of unused paid time off that is not contributed to the profitsharing plan until the taxable year in which the amount is paid to the participant.


Automatic contribution increases under automatic contribution arrangements

The IRS in Rev. Rul. 2009-30 addressed two different factual situations involving a 401(k) plan in which an individual's contributions automatically increased at specified intervals. Both situations involved 401(k) plans with an automatic enrollment feature.

The first situation involved an automatic enrollment 401(k) plan that was not designed to be a qualified automatic contribution arrangement. In that plan, contributions automatically increased each year at the time the employee received a raise, by an amount that varied based on the amount of the raise. The employee could opt out of the increase. The IRS ruled that the resulting default contributions will not fail to be considered elective contributions merely because they are made pursuant to an automatic contribution arrangement that includes an automatic contribution increase tied to an employee's increase in compensation. The IRS observed that because the plan was not a safe harbor plan, it was not necessary that the increase be of a uniform amount for each employee.

The second situation was the same as the first, except that the plan was an automatic contribution arrangement. In addition, the contribution increases were made annually, in 1 percent-of-compensation increments, and occurred April 1 each year. The IRS ruled that default contributions under an automatic contribution arrangement did not fail to satisfy the qualified percentage requirement (including uniformity and minimum percentage requirements) relating to a qualified automatic contribution arrangement or the uniformity requirement relating to an eligible automatic contribution arrangement merely because default contributions are made pursuant to an arrangement under which the default contribution percentage for all eligible employees increases on a date other than the first day of a plan year.


Eligible rollover distributions

Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy section 402(f). The first applies to a distribution not from a designated Roth account (as described in section 402A), and the second applies to a distribution from a designated Roth account. Notice 2009-68 updates the safe harbor explanations that were published in Notice 2002-3 to reflect changes in the law.