Converting an existing 401(k) plan to QACA

[Guest kh1]

Converting 401k plan to QACA effective Jan 1, 2015. Must all current participants complete new election forms? All current participants have previously completed election forms, several have declined to participate - do they need to decline (again)?

[Tom Poje]

sometimes the easiest answer is to simply look and see what document language is available. for example, the document language from one adoption agreement has:

8. Automatic Enrollment (Traditional or QACA)
a. Indicate who will be eligible to receive automatic contributions:
i. [ ] Eligible Employees who have not made an Elective Deferral election
ii. [ ] All Eligible Employees to the extent that no election was made or their Elective Deferral elections are less than the automatic enrollment amount
iii. [ ] Other:

but then maybe a different document wouldn't have such provisions.

[QDROphile]

Looking to pre-approved document language for what the law is or what one can do is foolish if that is the end of the inquiry. Unfortunately, many consultants think the universe is the product and the client is none the wiser. Why do so many think that elective deferrals must be suspended after a hardship distribution?

[John Feldt ERPA CPC QPA]

Okay.

Some plan documents require the plan sponsor to gather proof that all resources have been depleted before the hardship distribution can occur. Those plans do not need to require a suspension of deferrals.

Other plan documents require less effort by the sponsor regarding the "proof" needed before a hardship distribution can occur, but those documents also require a 6-month suspension of deferrals.

Many volume submitter plan documents allow an employer to elect one or the other. Some employers want one way, some the other way. That is how it is.

Hopefully most consultants at least think the plan's operation must match it's written terms. So let's hope that issue is now covered.

Back to the OP. What does the employer want to do? (I think that's partly what was suggested by Tom's post).

They certainly cannot say the automatic deferral only applies to new entrants only.

[Tom Poje]

as an added note:

the preamble to the regs on QACA indicate what was mentioned in the sample language I provided, namely only those who have affirmative election (which could be 0%) could be excluded from the default election.

from the Preamble (the entire preamble/reg can be found at http://www.irs.gov/irb/2009-12_IRB/ar08.html )

D. Exclusion of current affirmative elections from automatic enrollment

The proposed regulations provided that an automatic contribution arrangement does not fail to be a QACA merely because the default election is not applied to an employee who was eligible under the cash or deferred arrangement (or a predecessor arrangement) immediately prior to the effective date of the QACA and on that effective date had an affirmative election in effect (that remains in effect) to have elective contributions made on his or her behalf (in a specified amount or percentage of compensation) or not have elective contributions made on his or her behalf.

Some commentators requested that employers be permitted to treat employees who did not affirmatively elect to make elective contributions under the plan as though they had affirmatively elected zero. These commentators stated that it would be administratively difficult to determine which employees had affirmative elections in effect prior to the effective date of the QACA.

The regulations do not expand the exception for automatically enrolling current employees to employees who have not made an affirmative election. Under section 401(k)(13)©(iv)(II), only those employees who had an affirmative election in effect immediately before the QACA became effective are permitted to be excluded from having a default election apply to them.

[Guest kh1]

Okay.

Some plan documents require the plan sponsor to gather proof that all resources have been depleted before the hardship distribution can occur. Those plans do not need to require a suspension of deferrals.

Other plan documents require less effort by the sponsor regarding the "proof" needed before a hardship distribution can occur, but those documents also require a 6-month suspension of deferrals.

Many volume submitter plan documents allow an employer to elect one or the other. Some employers want one way, some the other way. That is how it is.

Hopefully most consultants at least think the plan's operation must match it's written terms. So let's hope that issue is now covered.

Back to the OP. What does the employer want to do? (I think that's partly what was suggested by Tom's post).

They certainly cannot say the automatic deferral only applies to new entrants only.

I understand the automatic deferral doesn't apply to new entrants only, but there are no employees who have not previously completed enrollment forms. From my understanding the employer wants to avoid having everyone complete new election forms, that's all. Several have elected zero in the past - I was just trying to make certain they were not required to complete a new form once the QACA is in place. Thank you to everyone for their comments.

[John Feldt ERPA CPC QPA]

If you have enrollment forms in place for all employees, including affirmative elections to defer zero by those not deferring, then you have the evidence you need to operationally say this automatic enrollment only applies to new entrants. The written plan language can say it applies to each participant that does not have an enrollment election in place. That should get you where you want to be.

Watch out for rehires and watch out for resuming deferrals after the hardship suspension (if the suspension provision happens to apply in your plan). Check your plan language (or perhaps the enrollment form itself) regarding how old deferral elections are treated after such events.