rr-09-30.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part 1

Section 401.—Qualified Pension, Profit-Sharing, Stock Bonus Plans, etc.

Automatic Contribution Increases under Automatic Contribution
Arrangements

Rev. Rul. 2009-30

ISSUES

1. Will default contributions to a profit-sharing plan fail to be considered
elective contributions merely because they are made pursuant to an automatic
contribution arrangement under which an eligible employee’s default contribution
percentage automatically increases in plan years after the first plan year of the eligible
employee’s participation in the automatic contribution arrangement based in part on
increases in the eligible employee’s plan compensation?

2. Will default contributions under an automatic contribution arrangement
fail to satisfy the qualified percentage requirement (including uniformity and minimum
percentage requirements) relating to a “qualified automatic contribution arrangement”
under section 401(k)(13) of the Internal Revenue Code (providing an automatic
enrollment nondiscrimination safe harbor) or the uniformity requirement relating to an
“eligible automatic contribution arrangement” under section 414(w) (permitting 90-day
withdrawals) 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?

FACTS

Situation 1

Employer X maintains Plan A, a profit-sharing plan intended to satisfy the
requirements of sections 401(a), 401(k), and 401(m), and maintained on a calendar-year
basis. Plan A is not intended to satisfy the requirements to be a qualified automatic
contribution arrangement or eligible automatic contribution arrangement.

Under Plan A, any eligible employee of Employer X may affirmatively elect to
receive his or her compensation entirely in cash or to have Employer X make specified
contributions on the eligible employee's behalf to Plan A in lieu of receiving those
amounts as cash compensation. Subject to certain limitations set forth in Plan A, the
eligible employee may designate the amount of these elective contributions as a

2
percentage of the eligible employee's “plan compensation,” defined under Plan A as base
pay (excluding overtime, bonuses, and other special compensation).

Under Plan A, if any eligible employee of Employer X does not affirmatively
elect to receive cash or to have a specified amount contributed to Plan A, default
contributions are automatically contributed to Plan A (with a corresponding reduction in
the eligible employee’s cash compensation) beginning with the first pay period of the
first plan year of the eligible employee’s participation in the automatic contribution
arrangement. For that first plan year, the default contribution percentage is 4 percent of
plan compensation. Any eligible employee may elect at any time not to make elective
contributions (including not to make default contributions) or to have Employer X
contribute to Plan A a different percentage of plan compensation.

Employer X usually provides annual increases in base pay for its employees
effective for pay periods beginning on or after the employment anniversary date for each
employee. Under Plan A, for plan years after the first plan year of the eligible
employee’s participation in the automatic contribution arrangement, the default
contribution percentage is automatically increased beginning with the first pay period that
begins on or after the eligible employee’s employment anniversary date. The increase in
the default contribution percentage is equal to the greater of (1) 1 percentage point, or (2)
a number of percentage points calculated as 30 percent of the percentage increase in the
eligible employee’s base pay for such first pay period over the eligible employee’s base
pay for the immediately preceding pay period (rounded to the nearest whole percentage).
However, under Plan A, the default contribution percentage may never exceed 11
percent. For example, the default contribution percentage for an employee with default
contributions beginning in 2009 would increase by 1 percentage point each plan year for
pay periods beginning on or after the employee’s employment anniversary date (to 5
percent in 2010, 6 percent in 2011, etc., up to 11 percent in 2016 and later plan years),
even if his or her base pay were not to increase. If the employee’s base pay were to
increase by at least 5 percent during one or more plan years before 2016, the default
contribution percentage would increase to 11 percent even earlier.

Eligible employees are provided notices satisfying the timing and content
requirements of section 1.401(k)-1(e)(2)(ii) of the Income Tax Regulations that explain
the default contribution percentage, automatic increases in the default contribution
percentage in plan years after the first plan year, and the eligible employees' right to elect
to have no elective contributions (including no default contributions) made to Plan A or
to alter the amount of those contributions.

Plan A provides that elective contributions are immediately nonforfeitable and, if
the eligible employee has not attained age 59-1/2, cannot be distributed prior to the
eligible employee's death or severance from employment, except in the case of hardship.
Plan A also provides that, for each eligible employee, Employer X will make matching
contributions to Plan A on account of the eligible employee’s elective contributions up to
a specified percentage of the eligible employee’s plan compensation.

3
Plan A provides that default contributions and related matching contributions will,
absent a contrary election, be invested in a qualified default investment alternative
(QDIA), as described in section 2550.404c-5 of Department of Labor regulations.

Situation 2

Employer Y maintains Plan B, a profit-sharing plan intended to satisfy the
requirements of sections 401(a), 401(k), and 401(m), and maintained on a calendar-year
basis. Plan B is also intended to satisfy the requirements to be a qualified automatic
contribution arrangement and an eligible automatic contribution arrangement.

Under Plan B, any eligible employee of Employer Y may affirmatively elect to
receive his or her compensation entirely in cash or to have Employer Y make specified
contributions on the eligible employee's behalf to Plan B in lieu of receiving those
amounts as cash compensation. Subject to certain limitations set forth in Plan B, the
eligible employee may designate the amount of these elective contributions as a
percentage of the eligible employee's “plan compensation,” defined under Plan B.

Under Plan B, if any eligible employee of Employer Y does not affirmatively
elect to receive cash or to have a specified amount contributed to Plan B, default
contributions are automatically contributed to Plan B (with a corresponding reduction in
the eligible employee’s cash compensation) beginning with the first pay period of the
first plan year of the eligible employee’s participation in the automatic contribution
arrangement. For that first plan year, the default contribution percentage is 3 percent of
plan compensation. Any eligible employee may elect at any time not to make elective
contributions (including not to make default contributions) or to have Employer Y
contribute to Plan B a different percentage of plan compensation.

Employer Y usually provides annual increases in compensation for its employees
effective for pay periods beginning on or after April 1 each year. Under Plan B, for plan
years after the first plan year of the eligible employee’s participation in the automatic
contribution arrangement, the default contribution percentage is automatically increased
beginning with the first pay period that begins on or after April 1. The increase in the
default contribution percentage is equal to 1 percentage point. However, under Plan B,
the default contribution percentage may never exceed 10 percent.

Eligible employees are provided notices satisfying the timing and content
requirements of sections 401(k)(13)(E) and 414(w)(4) that explain the default
contribution percentage, automatic increases to the default contribution percentage in
plan years after the first plan year, and the eligible employees' right to elect to have no
elective contributions (including no default contributions) made to Plan B or to alter the
amount of those contributions.

4
Plan B provides that elective contributions are immediately nonforfeitable and, if
the eligible employee has not attained age 59-1/2, cannot be distributed prior to the
eligible employee's death or severance from employment, except in the case of hardship
or in the case of a distribution that satisfies the requirements of section 414(w)(2). Plan
B also provides that, for each eligible employee, Employer Y will make specified
matching contributions to Plan B on account of the eligible employee's elective
contributions up to a specified percentage of the eligible employee's plan compensation
under a matching formula that satisfies the rules of sections 401(k)(13)(D)(i)(I), (ii), (iii),
and (iv) and 401(m)(12).

Plan B provides that default contributions and related matching contributions will,
absent a contrary election, be invested in a QDIA.

LAW

Automatic Contribution Arrangements under a Qualified Cash or Deferred
Arrangement

Section 401(k) provides that a profit-sharing or stock bonus plan, a pre-ERISA
money purchase plan, or a rural cooperative plan can meet the requirements of section
401(a) even if it includes a qualified cash or deferred arrangement. Section 401(k) also
sets forth the requirements that a cash or deferred arrangement must satisfy in order to be
a qualified cash or deferred arrangement.

Section 1.401(k)-1(a)(2)(i) defines a cash or deferred arrangement as an
arrangement under which an employee may make a cash or deferred election with respect
to contributions to, or accruals or other benefits under, a plan that is intended to satisfy
the requirements of section 401(a).

Section 1.401(k)-1(a)(3)(i) defines a cash or deferred election as any election (or
modification of an earlier election) by an employee to have the employer either provide
an amount to the employee in the form of cash (or some other taxable benefit) that is not
currently available or contribute an amount to a trust (or provide an accrual or other
benefit) under a plan deferring the receipt of compensation.

Section 1.401(k)-1(a)(3)(ii) provides that, for purposes of determining whether an
election is a cash or deferred election, it is irrelevant whether the default that applies in
the absence of an affirmative election is (1) for the employee to receive an amount in
cash or some other taxable benefit or (2) for the employer to contribute an amount to a
trust or provide an accrual or other benefit under a plan deferring the receipt of
compensation.

Section 1.401(k)-1(e)(2)(ii) provides that a qualified cash or deferred arrangement
must provide an employee with an effective opportunity to make (or change) a cash or
deferred election at least once during each plan year, and that whether an employee has
an effective opportunity is determined based on all the relevant facts and circumstances,

5
including the adequacy of notice of the availability of the election, the period of time
during which an election may be made, and any other conditions on elections.

Qualified Automatic Contribution Arrangements (Automatic Enrollment
Nondiscrimination Safe Harbor)

In general, section 401(k)(3) imposes nondiscrimination standards on qualified
cash or deferred arrangements, including an actual deferral percentage (ADP) test.
Similarly, in general, section 401(m) imposes nondiscrimination standards on employer
matching contributions made to a defined contribution plan on behalf of the employee,
including an actual contribution percentage (ACP) test.

Sections 401(k)(13) and 401(m)(12) provide alternative design-based safe harbors
for a cash or deferred arrangement that provides for automatic contributions at a specified
level and meets certain employer matching contribution (or employer nonelective
contribution), uniformity, notice, and other requirements. A cash or deferred
arrangement that satisfies these requirements is a qualified automatic contribution
arrangement that is treated as satisfying the ADP test and the ACP test.

Sections 1.401(k)-3 and 1.401(m)-3 prescribe rules for qualified automatic
contribution arrangements. These rules include, under section 1.401(k)-3(j)(1)(i), a
requirement that the default election under a qualified automatic contribution
arrangement be a contribution equal to a qualified percentage multiplied by the
employee’s eligible compensation from which elective contributions are permitted to be
made under the cash or deferred arrangement. Under section 1.401(k)-3(j)(2), in general
a default contribution percentage is a qualified percentage only if it is uniform for all
eligible employees, does not exceed 10 percent, and satisfies certain minimum percentage
requirements. Under section 1.401(k)-3(j)(2)(iii), several exceptions to the uniformity
requirement apply, including that a plan does not fail to satisfy the uniformity
requirement merely because the default contribution percentage varies based on the
number of years (or portions of years) since the beginning of the initial period for an
employee. For this purpose, the initial period begins when the employee first has
contributions made pursuant to a default election under an arrangement that is intended to
be a qualified automatic contribution arrangement for a plan year and ends on the last day
of the following plan year. Section 1.401(k)-3(j)(2)(ii) sets out the minimum percentage
requirements. In general, the minimum percentage is 3 percent for the initial period. The
minimum percentage is 4 percent for the next succeeding plan year, 5 percent for the next
succeeding plan year, and 6 percent for all succeeding plan years.

Eligible Automatic Contribution Arrangements (Permitting 90-day
Withdrawals)

Section 414(w) provides limited relief from generally-applicable distribution
restrictions under sections 401(k)(2)(B), 403(b)(7), 403(b)(11), and 457(d)(1)(A) in the
case of an eligible automatic contribution arrangement. In particular, sections 414(w)(1)
and 414(w)(2) provide that an applicable employer plan that contains an eligible

6
automatic contribution arrangement is permitted to allow employees, within 90 days after
the date of the first default contribution with respect to the employee under the
arrangement, to elect to receive a distribution equal to the amount of default contributions
(and attributable earnings) made with respect to the employee beginning with the first
payroll period to which the eligible automatic contribution arrangement applies to the
employee and ending with the effective date of the election. Sections 414(w)(1)(A) and
414(w)(1)(B) provide that the amount of the distribution is includible in gross income for
the taxable year in which the distribution is made, but is not subject to the additional
income tax under section 72(t). Under section 414(w), an automatic contribution
arrangement must satisfy uniformity, notice, and other requirements in order to be an
eligible automatic contribution arrangement.

Section 1.414(w)-1 prescribes rules under section 414(w), including, under
section 1.414(w)-1(b)(2)(i), that the default contribution election under an eligible
automatic contribution arrangement be a uniform percentage of compensation. Under
section 1.414(w)-1(b)(2)(ii), several exceptions to the uniformity requirement apply by
cross-reference to section 1.401(k)-3(j)(2)(iii), including a modified version of the
exception under which a plan does not fail to satisfy the uniformity requirement merely
because the default contribution percentage varies based on the number of years (or
portions of years) since the beginning of the initial period for an employee.

ANALYSIS

Situation 1

The default contributions made for an eligible employee in Situation 1 are elective
contributions made pursuant to a cash or deferred election and satisfy the requirement in
section 1.401(k)-1(a)(3)(i) that the amount that each eligible employee may defer as an
elective contribution be available to the eligible employee in cash (or some other taxable
benefit). Pursuant to section 1.401(k)-1(a)(3)(ii), the election is a cash or deferred
election and the contributions are elective contributions even though the contributions are
made pursuant to a default election in the absence of an affirmative election.

Because a default contribution percentage can be increased or otherwise changed
over time pursuant to a plan-specified schedule, the default contributions in Situation 1
do not cease to be elective contributions merely because default contribution percentages
increase over time and such increases are, in part, determined by reference to the amount
of, and are scheduled to take effect at or by reference to the time of, future increases in
base pay.

The structure of increases in the default contribution percentage for years after the
first plan year of an eligible employee’s participation in the automatic contribution
arrangement results in default contribution percentages for eligible employees that are not
uniform percentages of plan compensation for all eligible employees, and the percentages
do not vary based solely on the number of years (or portions of years) since the beginning
of the initial period described in section 1.401(k)-3(j)(2)(iii)(A). However, because the

7
automatic contribution arrangement in Situation 1 is not intended to be an eligible
automatic contribution arrangement or a qualified automatic contribution arrangement,
this nonuniformity is permissible.

Situation 2

The default contributions described in Situation 2 are elective contributions made
pursuant to cash or deferred elections and satisfy the requirement in section 1.401(k)-
1(a)(3)(i) that the amount that each eligible employee may defer as an elective
contribution be available to the eligible employee in cash (or some other taxable benefit).
Pursuant to section 1.401(k)-1(a)(3)(ii), the election is a cash or deferred election and the
contributions are elective contributions even though the contributions are made pursuant
to a default election in the absence of an affirmative election.

The default contributions described in Situation 2 do not cause the arrangement to
fail to satisfy the requirements for a qualified automatic contribution arrangement and an
eligible automatic contribution arrangement. In particular, the provisions in Plan B under
which, for plan years after the first plan year of an eligible employee’s participation in the
automatic contribution arrangement, the default contribution percentage is automatically
increased beginning with the first pay period that begins on or after April 1, do not cause
Plan B to fail the uniformity requirement of sections 1.401(k)-3(j)(2)(i) and 1.414(w)-
1(b)(2)(i). The increases are eligible for an exception to the uniformity requirement
because they apply in the same manner to all eligible employees for whom the same
number of years or portions of years have elapsed since default contributions were first
made for them under the automatic contribution arrangement.

Also, the default contribution percentages for each plan year after the first plan
year satisfy the minimum default contribution percentage requirements of section
1.401(k)-3(j)(2)(ii) for periods beginning both before and on or after April 1 of such a
plan year. This is because, under section 1.401(k)-3(j)(2)(ii)(B), the minimum default
contribution percentage of 4 percent is not required to apply until after the end of the plan
year following the first plan year of an eligible employee’s participation in the automatic
contribution arrangement, whereas, under Plan B, the increased default contribution
percentage of 4 percent applies earlier, beginning with the first pay period that begins on
or after April 1 of the plan year following the first plan year. Similarly, the minimum
default contribution percentages of 5 percent and 6 percent set out in section 1.401(k)-
3(j)(2)(ii)(C) and (D) are satisfied under Plan B earlier than required. Alternatively, if
under Plan B increased default contribution percentages had not begun to apply until
April 1 of the second plan year following the first plan year, the minimum default
contribution percentage requirements could have been satisfied by using an initial default
contribution percentage of 4 percent (rather than 3 percent).

HOLDINGS

1. Default contributions to a profit-sharing plan will not fail to be considered
elective contributions merely because they are made pursuant to an automatic

8
contribution arrangement under which an eligible employee’s default contribution
percentage automatically increases in plan years after the first plan year of the eligible
employee’s participation in the automatic contribution arrangement based in part on
increases in the eligible employee’s plan compensation.

2. Default contributions under an automatic contribution arrangement will
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.

DRAFTING INFORMATION

The principal author of this revenue ruling is Roger Kuehnle of the Employee
Plans, Tax Exempt and Government Entities Division. Questions regarding this revenue
ruling may be sent via e-mail to RetirementPlanQuestions@irs.gov
.