This fall the IRS published proposed rules on Qualified Automatic Contribution Arrangements (QACAs) for 401(k) plans, 403(b) tax-sheltered annuities, or 457(b) governmental plans. The guidance concerns design-based safe harbor created by the Pension Protection Act of 2007. By adopting a QACA, a plan may escape some nondiscrimination testing.

• the uniform application of a minimum and escalating percentage of automatic elective deferrals (but not more than 10%) to each eligible employee who fails to elect otherwise;
• the ability of each participant to elect out of the plan or to make elective deferrals at a different level;
• minimum employer matching or nonelective contributions on behalf of each eligible nonhighly compensated employee;
• vesting requirements for employer matching or nonelective contributions;
• distribution restrictions; and
• notice to participants.

The notice also provided additional guidance on the “uniformity” requirement of the plan, stating that the QACA will not fail if the plan:

• varies the elective deferral percentage based on the number of years an employee has participated in the plan;
• does not reduce the rate of elective deferral under a participant’s prior election that is in effect when the QACA becomes effective; or
• limits the amount of elective deferrals so as not to exceed the limits on compensation, elective deferrals, or benefits and compensation.

A full summary of the QACA regulation guidance, as well as additional information concerning permissible withdrawals of automatic contributions and corrective distributions of excess contributions can be found at the IRS website. The full proposed regulations and a Sample Automatic Enrollment and Default Investment Notice are also provided.

The regulations are proposed to become effective for plan years beginning on or after January 1, 2008. Issuance of final rules is expected in early 2008. If the final regulations’ provisions are more restrictive than those in the proposed rules, they will be applied prospectively. Comments on the proposed rules should be submitted to the IRS by February 6, 2008.