Limiting EACAs to New Participants

[dcoderre]

Some practitioners have interpreted the proposed regulations such that an EACA must automatically enroll all eligibles (who haven't made a deferral election) based on the uniformity requirement. In my opinion, the proposed regulations allow the EACA to be applied to new participants only. Most practitioners originally interpreted the plain language to allow application only to newly eligibles, and in my opinion, it is only through a strained reading that an alternative interpretation has been construed. If Congress wants to make a technical correction or if the IRS wants to clarify in future regulations, then we will have to live with it. But in the meantime, why make their conservative arguments for them? Keep in mind these are proposed regs, and there are arguments for a good faith interpretation to allow the EACA to be applied only to newly eligibles as most of us originally thought. I put forth the following arguments in the spirit of being advocates for our clients, and invite your additional arguments pro or con.

1) The proposed regs are quite clear for a QACA that it must apply to all, and the EACA does not have this same language. IRS knew how to make it clearly mandatory if they wanted to. Where they did not use the same language, we can presume they did not have the same intent absent other clear guidance.

2) The EACA makes reference to the ACA definition, and an ACA has never been required to apply to all eligibles. (An EACA is an ACA that meets 3 conditions: uniformity, notice & QDIA.) Pre-PPA, an ACA could clearly be applied only to those eligible on or after the start of the ACA if the plan wished. Nothing in PPA or the proposed regs add a requirement to clearly make it effective to all. This would be a big change, and I don't think the definition of ACA in 1.414(w)-1(e)(2) justifies such a conclusion. The language says "an eligible employee's affirmative election," which is different than saying "all eligible employees." 1.414(w)-1(e)(2) Automatic contribution arrangement. An automatic contribution arrangement means an arrangement that provides for a cash or deferred election that provides that in the absence of an eligible employee's affirmative election, a default election applies under which the employee is treated as having elected to have default elective contributions made on his or her behalf under the plan. This default election ceases to apply with respect to an employee if the employee makes an affirmative election (that remains in effect) to— (i) Not have any default elective contributions made on his or her behalf; or (ii) Have default elective contributions made in a different amount or percentage of compensation.

3) The history of ACA rulings started out applying only to newly eligibles, and was later expanded to make clear it could also be expanded to current participants who hadn't made an election. This was permissive to apply it to all eligibles, not mandatory. I think the definition from 1.414(w) is drafted in light of this history, to make it clear that it may apply to any eligible participant. (In 1998, Treasury and the Internal Revenue Service issued a ruling clarifying that automatic enrollment in 401(k) plans is permissible for newly hired employees (Rev. Rul. 98-30). Building on that beginning, Treasury and IRS issued a second ruling allowing automatic enrollment for current employees as well (Rev. Rul. 2000-8).)

4) The uniformity requirement is met, even with an application only to newly eligibles. It is uniformly applied to everyone the ACA applies to. Thus by applying the ACA to only newly eligibles, it can still meet the 3 requirements of uniformity, notice & QDIA and thus be a valid EACA.

[Tom Poje]

you might want to read the following dealing with EACAs and limiting participation, which appeared in yesterday's newsletter:

http://www.relius.net/News/TechnicalUpdates.aspx?ID=388

if you are not receiving the daily newsletter, then goto

http://benefitslink.com/newsletter/

it costs nothing and there is too much info out there that bears reading

[dcoderre]

Thanks, Tom. I had seen that posting which said "it appears no." Appearances can be deceiving. ;-)

[Tom Poje]

when proposed regs are issued, the good old boys at the IRS request comments for consideration. One of the comments from ASPPA is:

The final regulations should clarify that an EACA only needs to be applied to those employees hired on or after the effective date of the EACA.

so we will have to wait and see how the final regs come end up.

[Guest AEAllen]

when proposed regs are issued, the good old boys at the IRS request comments for consideration. One of the comments from ASPPA is:

The final regulations should clarify that an EACA only needs to be applied to those employees hired on or after the effective date of the EACA.

so we will have to wait and see how the final regs come end up.

You may not have noticed, but much of the benefits-area leadership, and leadership in general, at the IRS, is female (not "good old boys").