[Federal Register Volume 72, Number 216 (Thursday, November 8, 2007)]
[Proposed Rules]
[Pages 63144-63155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-21821]



[[Page 63144]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-133300-07]
RIN-1545-BG80


Automatic Contribution Arrangements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under sections 
401(k), 401(m), 402(c), 411(a), 414(w), and 4979(f) of the Internal 
Revenue Code relating to automatic contribution arrangements. These 
proposed regulations will affect administrators of, employers 
maintaining, participants in, and beneficiaries of eligible plans that 
include an automatic contribution arrangement under section 401(k)(13), 
401(m)(12), or 414(w).

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 6, 2008.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-133300-07), room 5203, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington 
DC 20044. Submissions may be hand-delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-133300-07), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC 20224 or sent electronically via the Federal 
erulemaking Portal at www.regulations.gov (IRS REG-133300-07).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa 
Mojiri-Azad, Dana Barry or William D. Gibbs at (202) 622-6060; 
concerning the submission of comments or to request a public hearing, 
[email protected], (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP; 
Washington, DC 20224. Comments on the collection of information should 
be received by January 7, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Sec. Sec.  1.401(k)-3 and 1.414(w)-1. The collection of information in 
Sec.  1.401(k)-3 is required to comply with the statutory notice 
requirements of sections 401(k)(13) and 401(m)(12), and is expected to 
be included in the notices currently provided to employees that inform 
them of their rights and benefits under the plan. The collection of 
information under Sec.  1.414(w)-1 is required to comply with the 
statutory notice requirements of section 414(w), and is expected to be 
included in the notices currently provided to employees that inform 
them of their rights and benefits under the plan. The likely 
recordkeepers are businesses or other for-profit institutions, 
nonprofit institutions, organizations, and state or local governments.
    Estimated total average annual recordkeeping burden: 30,000 hours.
    Estimated average annual burden hours per recordkeeper: 1 hour.
    Estimated number of recordkeepers: 30,000.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to regulations under 
sections 401(k), 401(m), 402(c), 411(a), and 4979 of the Internal 
Revenue Code (Code) and new proposed regulations under section 414(w) 
in order to reflect the provisions of section 902 of the Pension 
Protection Act of 2006, Public Law 109-280 (PPA '06). Section 902 of 
PPA '06 added sections 401(k)(13), 401(m)(12), and 414(w) to the Code 
to facilitate automatic contribution arrangements (sometimes referred 
to as automatic enrollment) in qualified cash or deferred arrangements 
under section 401(k), as well as in similar arrangements under sections 
403(b) and 457(b). An automatic contribution arrangement is a cash or 
deferred arrangement that provides that, in the absence of an 
affirmative election by an eligible employee, a default election 
applies under which the employee is treated as having made an election 
to have a specified contribution made on his or her behalf under the 
plan. These regulations would also amend the comprehensive regulations 
under sections 401(k) and 401(m) (published in 2004) and regulations 
under section 4979 to reflect other changes made by section 902 of PPA 
'06.
    Section 401(k)(1) provides that a profit-sharing, stock bonus, pre-
ERISA money purchase or rural cooperative plan will not fail to qualify 
under section 401(a) merely because it contains a qualified cash or 
deferred arrangement. Section 1.401(k)-1(a)(2) defines a cash or 
deferred arrangement (CODA) as an arrangement under which an eligible 
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) defines a cash or deferred election as any direct or 
indirect election (or modification of an earlier election) by an 
employee to have the employer either: (1) Provide an amount to the 
employee in the form of cash (or some other taxable benefit) that is 
not currently available; or (2) contribute an amount to a trust, or 
provide an accrual or other benefit, under a plan deferring the receipt 
of compensation. For purposes of determining whether an election is a 
cash or deferred election, Sec.  1.401(k)-1(a)(3) provides that it is 
irrelevant whether the default that applies in the absence of an 
affirmative election is cash (or some other taxable benefit) or a 
contribution, an accrual, or other

[[Page 63145]]

benefit under a plan deferring the receipt of compensation. 
Contributions that are made pursuant to a cash or deferred election 
under a qualified CODA are commonly referred to as elective 
contributions.
    In order for a CODA to be a qualified CODA, it must satisfy a 
number of other requirements. First, pursuant to section 401(k)(2)(A), 
the amount that each eligible employee under the arrangement may defer 
as an elective contribution must be available to the employee in cash. 
Section 1.401(k)-1(e)(2) provides that, in order for a CODA to satisfy 
this requirement, the arrangement must provide each eligible employee 
with an effective opportunity to make (or change) a cash or deferred 
election at least once during each plan year.
    Section 401(k)(2)(B) provides that a qualified CODA must provide 
that elective contributions may only be distributed after certain 
events, including hardship and severance from employment. Similar 
distribution restrictions apply under sections 403(b)(7) and 
403(b)(11). Section 457(d)(1)(A) includes distribution restrictions for 
eligible governmental deferred compensation plans.
    Section 401(k)(3)(A)(ii) applies a special nondiscrimination test 
to the elective contributions of highly compensated employees, within 
the meaning of section 414(q) (HCEs). Under this test, called the 
actual deferral percentage (ADP) test, the average percentage of 
compensation deferred for HCEs is compared annually to the average 
percentage of compensation deferred for nonhighly compensated employees 
(NHCEs) eligible under the plan, and if certain limits are exceeded by 
the HCEs, corrective action must be taken. Pursuant to section 
401(k)(8), one method of correction is distribution to HCEs of excess 
contributions made on their behalf.
    Section 401(m) provides a parallel test for matching contributions 
and employee after-tax contributions under a defined contribution plan, 
called the actual contribution percentage (ACP) test. Similarly, 
pursuant to section 401(m)(6), one method of correction of the ACP test 
is distribution to HCEs of excess aggregate contributions made on their 
behalf.
    Sections 401(k)(12) and 401(m)(11) provide a design-based safe 
harbor under which a CODA and any associated matching contributions are 
treated as satisfying the ADP and ACP tests if the arrangement meets 
certain contribution and notice requirements. Sections 1.401(k)-3 and 
1.401(m)-3 provide guidance on the requirements for this design-based 
safe harbor.
    Sections 401(k)(13) and 401(m)(12), added by PPA '06 and effective 
for plan years beginning on or after January 1, 2008, provide an 
alternative design-based safe harbor for a CODA that provides for 
automatic contributions at a specified level of contributions and meets 
certain contribution, notice, and other requirements. A CODA that 
satisfies these requirements, referred to as a qualified automatic 
contribution arrangement (QACA), is treated as satisfying the ADP and 
ACP tests.
    Section 414(w), added to the Code by section 902(d)(1) of PPA '06 
and effective for plan years beginning on or after January 1, 2008, 
further facilitates automatic enrollment by providing limited relief 
from the distribution restrictions under sections 401(k)(2)(B), 
403(b)(7), 403(b)(11), or 457(d)(1)(A) for an eligible automatic 
contribution arrangement (EACA).
    Sections 414(w)(1) and 414(w)(2) provide that an applicable 
employer plan that contains an EACA is permitted to allow employees to 
elect to receive a distribution equal to the amount of elective 
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. The election must be made 
within 90 days after the date of the first elective contribution with 
respect to the employee under the arrangement. 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).
    Section 414(w)(3) defines an EACA as an arrangement under which: 
(1) A participant may elect to have the employer make payments as 
contributions under the plan on behalf of the participant, or to the 
participant directly in cash, (2) the participant is treated as having 
elected to have the employer make such contributions in an amount equal 
to a uniform percentage of compensation provided under the plan until 
the participant specifically elects not to have such contributions made 
(or specifically elects to have such contributions made at a different 
percentage), (3) in the absence of an investment election by the 
participant, such contributions are invested in accordance with 
regulations prescribed by the Secretary of Labor under section 
404(c)(5) of the Employee Retirement Income Security Act of 1974 
(ERISA), and (4) participants are provided a notice that satisfies the 
requirements of section 414(w)(4).
    Section 414(w)(4) requires that, within a reasonable period before 
each plan year, each employee to whom the arrangement applies for such 
year receive written notice of the employee's rights and obligations 
under the arrangement which is sufficiently accurate and comprehensive 
to apprise the employee of such rights and obligations. Section 
414(w)(4)(A)(ii) requires that the notice be written in a manner 
calculated to be understood by the average employee to whom the 
arrangement applies. Section 414(w)(4)(B) provides that the notice must 
explain: (1) The employee's rights under the arrangement to elect not 
to have elective contributions made on the employee's behalf or to 
elect to have contributions made at a different percentage; and (2) how 
contributions made under the automatic contribution arrangement will be 
invested in the absence of any investment decision by the employee. In 
addition, the employee must be given a reasonable period of time after 
receipt of the notice and before the first elective contribution is 
made to make an election with respect to contributions. In many 
respects, the notice under section 414(w)(4) is the same as the notice 
required under section 401(k)(13) for a qualified automatic 
contribution arrangement.
    Section 414(w)(5) defines an applicable employer plan as an 
employee's trust described in section 401(a) that is exempt from tax 
under section 501(a), a plan described in section 403(b), or a section 
457(b) eligible governmental plan.
    Section 414(w)(6) provides that a withdrawal described in section 
414(w)(1) is not to be taken into account for purposes of the ADP test.
    Section 411(a)(3)(G), as amended by section 902(d)(2) of PPA '06, 
provides that a matching contribution shall not be treated as 
forfeitable merely because the matching contribution is forfeitable if 
it relates to a contribution that is withdrawn under an automatic 
contribution arrangement that satisfies the requirements of section 
414(w).
    Section 4979 provides an excise tax on excess contributions (within 
the meaning of section 401(k)(8)(B)) and excess aggregate contributions 
(within the meaning of section 401(m)(6)(B)) not distributed within 
2\1/2\ months after the close of the plan year for which the 
contributions are made. Section 902 of PPA '06 amended section 4979 to 
lengthen this 2\1/2\ month correction period for excess contributions 
and

[[Page 63146]]

excess aggregate contributions under an EACA to 6 months. Thus, in the 
case of an EACA, the section 4979 excise tax does not apply to any 
excess contributions or excess aggregate contributions which, together 
with income allocable to the contributions, are distributed or 
forfeited (if forfeitable) within six months after the close of the 
plan year.
    Section 902 of PPA '06 amended section 4979(f)(2) to provide that 
any distributions of excess contributions and excess aggregate 
contributions are includible in the employee's gross income for the 
taxable year in which distributed. However, pursuant to sections 
401(k)(8)(D) and 401(m)(7)(A), the distributions are not subject to the 
additional income tax under section 72(t). Section 902 of PPA '06 also 
amended sections 401(k)(8), 401(m)(6), and 4979(f)(1) to eliminate the 
requirement that excess contributions or excess aggregate contributions 
(whether or not under an EACA) include income allocable to the period 
after the end of the plan year (gap period income).
    Section 624 of PPA '06 amended section 404(c) of ERISA to provide 
that a participant in an individual account plan meeting the notice 
requirements of section 404(c)(5)(B) of ERISA is treated as exercising 
control over the assets in the account which, in the absence of an 
investment election by the participant, are invested in accordance with 
regulations prescribed by the Secretary of Labor. The specific timing 
and content requirements for the notice required under section 
404(c)(5)(B) of ERISA are generally the same as under section 
414(w)(4), but the Department of Labor (DOL) has interpretative 
jurisdiction for that notice.
    Section 902 of PPA '06 also amended section 514 of ERISA to preempt 
any State law which would directly or indirectly prohibit or restrict 
the inclusion in any plan of an automatic contribution arrangement. The 
Secretary of Labor is authorized to prescribe regulations which would 
establish minimum standards that such an arrangement would be required 
to satisfy in order for this preemption to apply to such an 
arrangement. The definition of an automatic contribution arrangement 
under section 514 of ERISA is generally the same as the definition of 
an EACA under section 414(w)(3), (including the requirement that 
automatic contributions under the arrangement must be invested in 
accordance with regulations prescribed by the Secretary of Labor under 
section 404(c)(5) of ERISA), but the definition does not include a 
notice requirement. However, section 514(e)(3) of ERISA requires a 
notice to be provided to each participant to whom the arrangement 
applies. As in the case for the notice under section 404(c)(5)(B) of 
ERISA, the specific timing and content requirements under section 
514(e)(3) of ERISA are generally the same as the notice requirements 
under section 414(w)(4), but the interpretative jurisdiction for that 
notice is also with the DOL.

Explanation of Provisions

1. Qualified Automatic Contribution Arrangement Under Section 
401(k)(13)

    The proposed regulations would amend Sec. Sec.  1.401(k)-3 and 
1.401(m)-3 to reflect the provisions of sections 401(k)(13) and 
401(m)(12) for a QACA, the new design-based safe harbor for satisfying 
the ADP and ACP tests. To the extent that the requirements to be a QACA 
are the same as those for the safe harbor described in sections 
401(k)(12) and 401(m)(11), these proposed regulations would apply the 
existing rules currently in Sec. Sec.  1.401(k)-3 and 1.401(m)-3 to a 
QACA. Thus, for example, because Sec.  1.401(k)-3(e) applies to a QACA, 
except to the extent otherwise provided in section 1107 of PPA '06 or 
Sec.  1.401(k)-3(f) or Sec.  1.401(k)-3(g), the plan provision 
implementing the QACA for an existing qualified CODA would be required 
to be adopted before the first day of the plan year and remain in 
effect for an entire 12-month plan year. Similarly under Sec.  
1.401(k)-3(c)(6), a plan would be permitted to limit the amount of 
elective contributions that may be made by an eligible employee under 
the QACA, provided that each NHCE who is an eligible employee generally 
is permitted to make elective contributions in an amount that is at 
least sufficient to receive the maximum amount of matching 
contributions available under the plan for the plan year, and the 
employee is permitted to elect any lesser amount of elective 
contributions.
    In order to be a QACA, the plan must provide a specified schedule 
of automatic contributions (called qualified percentages) for each 
eligible employee beginning with an initial minimum qualified 
percentage of 3 percent of compensation. This minimum qualified 
percentage begins when the employee first participates in the automatic 
contribution arrangement that is intended to be a QACA and ends on the 
last day of the following plan year. Thus, this initial period for a 
participant could last as long as two full plan years. After this 
initial period, the minimum qualified percentage increases by 1 percent 
for each of the next three plan years. Thus, the minimum qualified 
percentage for the plan year after the initial period is 4 percent. 
This minimum qualified percentage increases to 5 percent for the next 
plan year, and then is 6 percent for all plan years thereafter. These 
are merely minimum qualified percentages. Thus, a QACA can provide for 
higher percentages. For example, a QACA could provide for a qualified 
percentage in the initial period of 4 percent of compensation. If a 
plan did so, it could also provide a 4 percent qualified percentage for 
the plan year after the initial period (the statutory minimum 
percentage for that plan year), 5 percent in the next plan year and 6 
percent thereafter. However, the qualified percentage can at no time 
exceed 10 percent of compensation.
    Under section 401(k)(13)(C)(iii), the qualified percentage must be 
applied uniformly to all eligible employees. The proposed regulations 
would provide that a plan does not fail this requirement merely because 
the percentage varies for the following reasons: (1) The percentage 
varies based on the number of years an eligible employee has 
participated in the automatic contribution arrangement intended to be a 
QACA; (2) the rate of elective contributions under a cash or deferred 
election that is in effect on the effective date of the default 
percentage under the QACA is not reduced; or (3) the amount of elective 
contributions is limited so as not to exceed the limits of sections 
401(a)(17), 402(g) (determined with or without catch-up contributions 
described in section 402(g)(1)(C) or section 402(g)(7)) or 415. 
Further, the proposed regulations would provide that a cash or deferred 
arrangement does not fail to satisfy the uniformity requirement merely 
because an employee is not automatically enrolled during a period that 
the employee is not permitted to make elective contributions because of 
the requirement to suspend elective contributions for a 6-month period 
following a hardship distribution. In the case of an employee whose 
elective contributions have been suspended (for example, because of a 
hardship distribution), the plan must provide that the employee will, 
at the end of the suspension period, resume elective contributions at 
the level (percentage) that would apply if the suspension had not 
occurred.
    Reflecting section 401(k)(13)(C)(ii), the proposed regulations 
provide that the default election ceases to apply to any eligible 
employee if the employee makes an affirmative election that remains in 
effect to not have any elective contributions made on his or her behalf 
or to have elective

[[Page 63147]]

contributions made in a specified amount or percentage of compensation 
on his or her behalf. Thus, an employee can make an affirmative 
election to contribute at a certain level and have that election apply 
for all subsequent plan years. Similarly, an employee can make an 
affirmative election to have no elective contributions made on his or 
her behalf. This latter election is not the same as the election to 
withdraw prior elective contributions under section 414(w).
    The proposed regulations also reflect section 401(k)(13)(C)(iv), 
which provides an exception from the default election for eligible 
employees who were eligible to participate in the CODA (or a 
predecessor CODA) immediately before the effective date of the QACA and 
who have an election in effect on that effective date. The proposed 
regulations would provide that an election in effect means an 
affirmative election that remains in effect to have the employer make 
elective contributions on his or her behalf (in a specified amount or 
percentage of compensation) or to not have the employer make elective 
contributions on his or her behalf. Generally, this would require that 
the employee have completed an election form and chosen an amount or 
percentage (including zero) of his compensation to be deferred.
    The proposed regulations reflect the matching or nonelective 
contribution requirement of section 401(k)(13)(D). As with the safe 
harbor in section 401(k)(12), section 401(k)(13) provides a choice for 
an employer between satisfying a matching contribution requirement or a 
nonelective contribution requirement. However, while the QACA requires 
the same level of employer nonelective contributions as under section 
401(k)(12), the matching contribution requirement for a QACA allows for 
a lower level of matching contributions. Specifically, a QACA using the 
matching contribution alternative need only provide for matching 
contributions on behalf of each eligible NHCE equal to 100 percent of 
the employee's elective contributions that do not exceed one percent of 
compensation and 50 percent of the employee's elective contributions 
that exceed one percent but do not exceed six percent of compensation. 
In addition, a QACA allows a slower schedule of vesting for both 
matching and nonelective safe harbor contributions than the safe harbor 
in section 401(k)(12). All QACA safe harbor contributions must be fully 
vested after 2 years of vesting service (within the meaning of section 
411(a)), rather than immediately as required by section 401(k)(12). In 
addition, the proposed regulations would apply the same distribution 
restrictions that apply to safe harbor contributions and nonelective 
contributions under section 401(k)(12) to QACA safe harbor 
contributions.
    Each eligible employee under a QACA must receive a safe harbor 
notice within a reasonable period before each plan year. The proposed 
regulations reflect the requirement that this notice must provide the 
information required under section 401(k)(12). The regulations also 
reflect the additional timing and content requirements described in 
section 401(k)(13)(E)(i). Thus, the notice must also explain: (1) The 
employee's right under the arrangement to elect not to have elective 
contributions made on the employee's behalf or to elect to have 
contributions made in a different amount or percentage of compensation; 
and (2) how contributions made under the automatic contribution 
arrangement will be invested in the absence of any investment decision 
by the employee (including, in the case of an arrangement under which 
the employee may elect among two or more investment options, how 
contributions made under the automatic contribution arrangement will be 
invested in the absence of an investment election by the employee). 
These additional requirements cannot be satisfied by reference to the 
plan's summary plan description. Further, the proposed regulations 
would provide that in order to satisfy section 401(k)(13)(E)(ii)(III), 
under the QACA, the employee must be given a reasonable period of time 
after receipt of the notice and before the first elective contribution 
is to be made to make an election with respect to contributions and 
investments.
    The proposed regulations interpret the requirement under section 
401(k)(13)(E)(i) to provide a notice within a reasonable period before 
each plan year by applying the rules of Sec.  1.401(k)-3(d)(3). Thus, 
the proposed regulations would provide that the general determination 
of whether the timing requirement is satisfied is based on all of the 
relevant facts and circumstances, and the deemed timing rule of Sec.  
1.401(k)-3(d)(3)(ii) applies. Under this deemed timing rule, the timing 
requirement is satisfied if at least 30 days (and no more than 90 days) 
before the beginning of each plan year, the notice is given to each 
eligible employee for the plan year. The proposed regulations would 
also provide that in the case of an employee who does not receive the 
notice within the period described in the previous sentence because the 
employee becomes eligible after the 90th day before the beginning of 
the plan year, the timing requirement is deemed to be satisfied if the 
notice is provided no more than 90 days before the employee becomes 
eligible (and no later than the date the employee becomes eligible). 
Thus, for example, the preceding sentence would apply to all eligible 
employees for the first plan year under a newly established plan that 
provides for elective contributions, and to the first plan year in 
which an employee becomes eligible under an existing plan that provides 
for elective contributions. In the case of a plan with immediate 
eligibility when an employee is hired, this deemed timing rule would be 
satisfied if the employee is provided the notice on the first day of 
employment.

2. Eligible Automatic Contribution Arrangement Under Section 414(w)

    In order to further facilitate automatic enrollment, section 414(w) 
provides limited relief from the distribution restrictions under 
sections 401(k)(2), 403(b)(7), 403(b)(11), and 457(d) (as well as 
certain other relief provisions) for an applicable plan (that is, a 
section 401(k) plan, a section 403(b) plan, or a section 457(b) 
eligible governmental plan) with an EACA. Specifically, section 
414(w)(2) provides that, under an applicable employer plan with an 
EACA, an employee can be permitted to elect to receive a distribution 
equal to the amount of default elective contributions (and attributable 
earnings) made with respect to the first payroll period to which the 
EACA applies to the employee and any succeeding payroll periods 
beginning before the effective date of the election.
    An employer is permitted, but not required, to include the section 
414(w)(2) permissible withdrawal provision in an applicable employer 
plan, and an employer who does offer this option is not required to 
make it available to all employees eligible under the EACA. Thus, for 
example, an employer might choose to make the withdrawal option 
available only to employees for whom no elective contributions have 
been made under the CODA (or a predecessor CODA) before the EACA is 
effective. However, under a section 401(k) plan or a section 403(b) 
plan, the employer may not condition the right to take the withdrawal 
on the employee making an election to have no future elective 
contributions made on the employee's behalf because such a condition 
would violate the contingent benefit rule under section 401(k)(4)(A) or 
the universal availability requirement under section 403(b)(12)(A)(ii).

[[Page 63148]]

Nonetheless, the employer could provide in the withdrawal election form 
a default election under which elective contributions would cease 
unless the employee makes an affirmative election.
    Under section 414(w)(2)(B), the election to withdraw the 
contributions that were made under an EACA must be made within 90 days 
of the ``first elective contribution with respect to the employee under 
the arrangement.'' The proposed regulations would define the 
arrangement for this purpose as the EACA so that the withdrawal option 
could apply to employees previously eligible under the CODA (including 
a CODA that is an automatic contribution arrangement but was not an 
EACA). Because section 414(w) only applies to plan years beginning on 
or after January 1, 2008, an automatic contribution arrangement can 
only become an EACA on or after that date. Accordingly, a withdrawal 
election under section 414(w) can only apply to elective contributions 
made after that date. The proposed regulations would provide that the 
90-day window for making the withdrawal election begins on the date on 
which the compensation that is subject to the cash or deferred election 
would otherwise have been included in gross income. In addition, the 
proposed regulations would provide that the effective date of the 
election must be no later than the last day of the payroll period that 
begins after the date of the election.
    The proposed regulations would provide that the distribution is 
generally the account balance attributable to the default elective 
contributions, adjusted for gains and losses. The distribution may be 
reduced by any generally applicable fees. However, the proposed 
regulations provide that the plan may not charge a different fee for 
this distribution than would apply to other distributions. Also, if the 
default elective contributions are not maintained in a separate 
account, the amount of the allocable gains and losses will be 
determined under rules similar to those provided under Sec.  1.401(k)-
2(b)(2)(iv) for the distribution of excess contributions.
    The amount withdrawn under section 414(w) is includible in gross 
income in the year in which it is distributed, except amounts that are 
distributions of designated Roth contributions are not included in an 
employee's gross income a second time. The proposed regulations would 
require that this amount be reported on Form 1099-R, Distributions From 
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, 
Insurance Contracts, etc. However, the amount is not subject to the 
additional income tax under section 72(t). Finally, the proposed 
regulations would amend Sec.  1.402(c)-2 to include these withdrawals 
in the list of distributions that are not eligible for rollover.
    Any employer matching contribution with respect to the default 
elective contribution distributed pursuant to section 414(w) must be 
forfeited. The forfeited matching contribution is not a mistaken 
contribution or other erroneous contribution, and, thus, it cannot be 
returned to the employer (or be distributed to the employee as is 
permitted for an excess aggregate contribution). The proposed 
regulations would provide that the forfeited contribution must remain 
in the plan and be treated in the same manner under the plan terms as 
any other forfeiture under the plan.
    Under section 414(w)(3)(B), an EACA must provide that the default 
elective contribution is a uniform percentage of compensation. The 
proposed regulations would provide that the permitted differences in 
contribution rates provided in these proposed regulations under section 
401(k)(13) for a QACA also apply to an EACA.
    Another requirement to be an EACA under section 414(w)(3)(C) is 
that automatic contributions are invested in accordance with 
regulations prescribed by the Secretary of Labor under section 
404(c)(5) of ERISA. These proposed regulations would provide that this 
requirement only applies if the plan is otherwise subject to Title I of 
ERISA. Thus, for example, this provision would not apply to a 
governmental plan (within the meaning of section 414(d)).
    The proposed regulations reflect the section 414(w) notice 
requirement under which notice must be provided to each employee to 
whom the EACA applies within a ``reasonable period'' before each plan 
year, but provide that, if an employee becomes eligible in a given 
year, notice must be given within a ``reasonable period'' before the 
employee becomes eligible. The proposed regulations provide a deemed 
timing requirement that is generally the same as the deemed timing rule 
in Sec.  1.401(k)-3(d)(3)(ii).

3. Coordinated Notices

    As noted in this preamble, PPA '06 provides for several notices 
relating to automatic contribution arrangements that have similar 
content and timing requirements, including the notices required by 
sections 404(c)(5)(B) and 514(e)(3) of ERISA. The IRS, in coordination 
with DOL, anticipates that a single document can satisfy all of these 
notice requirements, so long as it has all of the requisite information 
for plan participants and satisfies the timing requirements for each of 
those notices.

4. Other Provisions of Section 902 of PPA '06

    The proposed regulations also reflect the amendments to section 
4979 made by section 902 of PPA '06. First, the proposed regulations 
reflect the substitution of 6 months for 2\1/2\ months as the time 
period under section 4979(f) by which excess contributions or excess 
aggregate contributions with respect to an EACA must be distributed to 
avoid the excise tax under section 4979(a). Further, the proposed 
regulations reflect the elimination of the requirement that 
distributions of excess contributions or excess aggregate contributions 
(whether or not under an EACA) include attributable earnings for the 
period after the end of the plan year (gap period income). The proposed 
regulations also reflect the change in the tax treatment of a 
distribution of excess contributions or excess aggregate contributions 
(whether or not under an EACA) under which the distribution of excess 
contributions or excess aggregate contributions (including earnings) is 
includible in the participant's gross income for the year of the 
distribution (without regard to the amount of the distribution). The 
proposed regulations would also amend Sec. Sec.  1.401(k)-2 and 
1.401(m)-2 to reflect these provisions in the correction rules for the 
ADP and ACP tests. All of these changes are proposed to be effective 
January 1, 2008 and will impact corrective distributions made in 2009.
    In addition, the proposed regulations would amend Sec. Sec.  
1.401(k)-2 and 1.401(m)-2 to reflect the provisions of section 
414(w)(6) that default elective contributions distributed under section 
414(w) are not taken into account in the ADP test. They are also not 
permitted to be taken into account in the ACP test. The proposed 
regulations under section 401(m) have added a conforming change for 
other elective contributions that are not taken into account in the ADP 
test. The proposed regulations would also amend Sec.  1.411(a)-4(b)(7) 
to reflect the amendment to section 411(a)(3)(G) made by PPA '06 
section 902(d)(2).

Effective Date

    Sections 401(k)(13), 401(m)(12), and 414(w), and the amended 
provisions of sections 411(a)(3)(G) and 4979(f), are effective for plan 
years beginning on or after January 1, 2008. These regulations are 
proposed to be effective for plan years beginning on or after January 
1, 2008. Taxpayers may rely on these proposed regulations for guidance

[[Page 63149]]

pending the issuance of final regulations. If, and to the extent, the 
final regulations are more restrictive than the guidance in these 
proposed regulations, those provisions of the final regulations will be 
applied without retroactive effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has been 
determined that 5 U.S.C. 533(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these proposed 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that most small entities that maintain plans that will be 
eligible for the safe harbor provisions of sections 401(k) and 401(m) 
or the distribution relief provisions of section 414(w) currently 
provide a similar notice with which this notice can be combined. 
Therefore, an analysis under the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) is not required. Pursuant to section 7805(f) of the Internal 
Revenue Code, these regulations have been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comments 
on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (one signed and eight (8) 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and Treasury Department specifically request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing will be scheduled if requested in writing by 
any person who timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place of the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Dana Barry, William 
Gibbs, and Lisa Mojiri-Azad, Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel 
from the IRS and Treasury Department participated in the development of 
these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended to read 
as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.401(k)-3 is also issued under 26 U.S.C. 401(k)(13)

    Par. 2. Section 1.401(k)-0 is amended by:
    1. Amending the entry for Sec.  1.401(k)-2 by adding entries for 
Sec. Sec.  1.401(k)-2(a)(5)(vi) and 1.401(k)-2(b)(2)(iv)(D).
    2. Revising the entries for Sec. Sec.  1.401(k)-2(b)(2)(vi)(A) and 
1.401(k)-2(b)(2)(vi)(B).
    3. Adding an entry for Sec.  1.401(k)-2(b)(5)(iii).
    4. Revising the entries for Sec. Sec.  1.401(k)-3(a)(1), 1.401(k)-
3(a)(2) and 1.401(k)-3(a)(3).
    5. Adding entries for Sec. Sec.  1.401(k)-3(i), 1.401(k)-3(j) 
through (j)(2)(iii).
    6. Adding entries for Sec.  1.401(k)-3(k) through (k)(4)(iii).
    The additions and revisions to read as follows:


Sec.  1.401(k)-0  Table of Contents.

* * * * *
Sec.  1.401(k)-2 ADP test.
    (a) * * *
    (5) * * *
    (vi) Default elective contributions pursuant to section 414(w).
* * * * *
    (b) * * *
    (2) * * *
    (iv) * * *
    (A) * * *
    (D) Plan years before 2008.
* * * * *
    (vi) * * *
    (A) Corrective distributions for plan years beginning on or 
after January 1, 2008.
    (B) Corrective distributions for plan years beginning before 
January 1, 2008.
* * * * *
    (5) * * *
    (iii) Special rule for eligible automatic contribution 
arrangements.
* * * * *
Sec.  1.401(k)-3 Safe harbor requirements.
    (a) * * *
    (1) Section 401(k)(12) safe harbor.
    (2) Section 401(k)(13) safe harbor.
    (3) Requirements applicable to safe harbor contributions.
* * * * *
    (i) Reserved.
    (j) Qualified automatic contribution arrangement.
    (1) Automatic contribution requirement.
    (i) In general.
    (ii) Automatic contribution arrangement.
    (iii) Exception for certain current employees.
    (2) Qualified percentage.
    (i) In general.
    (ii) Minimum percentage requirements.
    (A) Initial-year requirement.
    (B) Second-year requirement.
    (C) Third-year requirement.
    (D) Later years requirement.
    (iii) Exception to uniform percentage requirement.
    (k) Modifications to contribution requirements and notice 
requirements for automatic contribution safe harbor.
    (1) In general.
    (2) Lower matching requirement.
    (3) Modified nonforfeiture requirement.
    (4) Additional notice requirements.
    (i) In general.
    (ii) Additional information.
    (iii) Timing requirements.

    Par. 3. Section 1.401(k)-1 is amended by:
    1. Revising paragraph (b)(1)(ii)(C) and adding new paragraph 
(b)(1)(ii)(D).
    2. Revising paragraph (e)(7) by adding a new sentence after the 
fifth sentence.
    The additions and revisions read as follows:


Sec.  1.401(k)-1  Certain cash or deferred arrangements.

* * * * *
    (b) * * * (1) * * * (ii) * * *
    (C) The ADP safe harbor provisions of section 401(k)(13) described 
in Sec.  1.401(k)-3; or
    (D) The SIMPLE 401(k) provisions of section 401(k)(11) described in 
Sec.  1.401(k)-4.
* * * * *
    (e) * * *
    (7) Plan provision requirement. * * * In addition, a plan that uses 
the safe harbor method of section 401(k)(13), as described in paragraph 
(b)(1)(ii)(C) of this section, must specify the default percentages 
that apply for the plan year, and whether the safe harbor contribution 
will be the nonelective safe harbor contribution or the matching safe 
harbor contribution and is not permitted to provide that ADP testing 
will be used

[[Page 63150]]

if the requirements for the safe harbor are not satisfied. * * *
* * * * *
    Par. 4. Section 1.401(k)-2 is amended by:
    1. Adding paragraph (a)(5)(vi).
    2. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
    3. Removing paragraph (b)(2)(iv)(E).
    4. Revising paragraph (b)(2)(vi)(A).
    5. Adding a new first sentence to paragraph (b)(2)(vi)(B).
    6. Removing and reserving Example (3), Example (4), and Example (5) 
from Sec.  1.401(k)-2 (b)(2)(viii).
    7. Revising paragraph (b)(4)(iii) and adding paragraph (b)(5)(iii).
    The additions and revisions read as follows:


Sec.  1.401(k)-2  ADP test.

    (a) * * *
    (5) * * *
    (vi) Default elective contributions pursuant to section 414(w). 
Default elective contributions made under an eligible automatic 
contribution arrangement (within the meaning of Sec.  1.414(w)-1(b) 
that are distributed pursuant to Sec.  1.414(w)-1(c) for plan years 
beginning on or after January 1, 2008, are not taken into account under 
paragraph (a)(4) of this section for the plan year for which the 
contributions are made, or for any other plan year.
    (b) * * *
    (2) * * *
    (iv) Income allocable to excess contributions--(A) General rule. 
For plan years beginning on or after January 1, 2008, the income 
allocable to excess contributions is equal to the allocable gain or 
loss through the end of the plan year. See paragraph (b)(2)(iv)(D) of 
this section for rules that apply to plan years beginning before 
January 1, 2008.
* * * * *
    (D) Plan years before 2008. For plan years beginning before January 
1, 2008, the income allocable to excess contributions is determined 
under Sec.  1.401(k)-2(b)(2)(iv) (as it appeared in the April 1, 2007, 
edition of 26 CFR part 1).
* * * * *
    (vi) Tax treatment of corrective distributions--(A) Corrective 
distributions for plan years beginning on or after January 1, 2008. 
Except as provided in this paragraph (b)(2)(vi), for plan years 
beginning on or after January 1, 2008, a corrective distribution of 
excess contributions (and allocable income) is includible in the 
employee's gross income for the employee's taxable year in which 
distributed. In addition, the corrective distribution is not subject to 
the early distribution tax of section 72(t). See also paragraph (b)(5) 
of this section for additional rules relating to the employer excise 
tax on amounts distributed more than 2\1/2\ months (6 months in the 
case of a plan that includes an eligible automatic contribution 
arrangement within the meaning of section 414(w)) after the end of the 
plan year. See also Sec.  1.402(c)-2, A-4 for restrictions on rolling 
over distributions that are excess contributions.
    (B) Corrective distributions for plan years beginning before 
January 1, 2008. The tax treatment of corrective distributions for plan 
years beginning before January 1, 2008, is determined under Sec.  
1.401(k)-2(b)(2)(vi) (as it appeared in the April 1, 2007, edition of 
26 CFR Part 1). * * *
* * * * *
    (4) * * *
    (iii) Permitted forfeiture of QMAC. Pursuant to section 
401(k)(8)(E), a qualified matching contribution is not treated as 
forfeitable under Sec.  1.401(k)-1(c) merely because under the plan it 
is forfeited in accordance with paragraph (b)(4)(ii) of this section or 
Sec.  1.414(w)-1(d)(2).
* * * * *
    (5) * * *
    (iii) Special rule for eligible automatic contribution 
arrangements. In the case of a plan that includes an eligible automatic 
contribution arrangement within the meaning of section 414(w), 6 months 
is substituted for 2\1/2\ months in paragraph (b)(5)(i) of this 
section.
* * * * *
    Par. 5. Section 1.401(k)-3 is amended by:
    1. Revising paragraph (a).
    2. Revising the first sentence of paragraph (e)(1).
    3. Revising the last sentence of paragraph (h)(2).
    4. Revising the first sentence of paragraph (h)(3).
    5. Reserving paragraph (i) and adding paragraphs (j), and (k).
    The additions and revisions to read as follows:


Sec.  1.401(k)-3  Safe harbor requirements.

    (a) ADP test safe harbor--(1) Section 401(k)(12) safe harbor. A 
cash or deferred arrangement satisfies the ADP safe harbor provision of 
section 401(k)(12) for a plan year if the arrangement satisfies the 
safe harbor contribution requirement of paragraph (b) or (c) of this 
section for the plan year, the notice requirement of paragraph (d) of 
this section, the plan year requirements of paragraph (e) of this 
section, and the additional rules of paragraphs (f), (g), and (h) of 
this section, as applicable.
    (2) Section 401(k)(13) safe harbor. For plan years beginning on or 
after January 1, 2008, a cash or deferred arrangement satisfies the ADP 
safe harbor provision of section 401(k)(13) for a plan year if the 
arrangement is described in paragraph (j) of this section and satisfies 
the safe harbor contribution requirement of paragraph (k) of this 
section for the plan year, the notice requirement of paragraph (d) of 
this section (modified to include the information set forth in 
paragraph (k)(4) of this section), the plan year requirements of 
paragraph (e) of this section, and the additional rules of paragraphs 
(f), (g), and (h) of this section, as applicable. A cash or deferred 
arrangement that satisfies the requirements of this paragraph is 
referred to as a qualified automatic contribution arrangement.
    (3) Requirements applicable to safe harbor contributions. Pursuant 
to section 401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), the safe 
harbor contribution requirement of paragraph (b), (c), or (k) of this 
section must be satisfied without regard to section 401(l). The 
contributions made under paragraph (b) or (c) of this section (and the 
corresponding contributions under paragraph (k) of this section) are 
referred to as safe harbor nonelective contributions and safe harbor 
matching contributions, respectively.
* * * * *
    (e) * * * (1) General rule. Except as provided in this paragraph 
(e) or in paragraph (f) of this section, a plan will fail to satisfy 
the requirements of sections 401(k)(12), 401(k)(13), and this section 
unless plan provisions that satisfy the rules of this section are 
adopted before the first day of the plan year and remain in effect for 
an entire 12-month plan year. * * *
* * * * *
    (h) * * *
    (2) Use of safe harbor nonelective contributions to satisfy other 
discrimination tests. * * * However, pursuant to section 
401(k)(12)(E)(ii) and section 401(k)(13)(D)(iv), to the extent they are 
needed to satisfy the safe harbor contribution requirement of paragraph 
(b) of this section, safe harbor nonelective contributions may not be 
taken into account under any plan for purposes of section 401(l) 
(including the imputation of permitted disparity under Sec.  
1.401(a)(4)-7).
    (3) Early participation rules. Section 401(k)(3)(F) and Sec.  
1.401(k)-2(a)(1)(iii)(A), which provide an alternative 
nondiscrimination rule for certain plans that provide for early 
participation, do not apply for purposes

[[Page 63151]]

of section 401(k)(12), section 401(k)(13), and this section. * * *
* * * * *
    (i) [RESERVED].
    (j) Qualified automatic contribution arrangement--(1) Automatic 
contribution requirement--(i) In general. A cash or deferred 
arrangement is described in this paragraph (j) if it is an automatic 
contribution arrangement described in paragraph (j)(1)(ii) of this 
section where the default election under that arrangement is a 
contribution equal to the qualified percentage described in paragraph 
(j)(2) of this section multiplied by the eligible employee's 
compensation from which elective contributions are permitted to be made 
under the cash or deferred arrangement.
    (ii) Automatic contribution arrangement. An automatic contribution 
arrangement is a cash or deferred arrangement within the meaning of 
Sec.  1.401(k)-1(a)(2) that provides that in the absence of an eligible 
employee's affirmative election, a default applies under which the 
employee is treated as having made an election to have a specified 
contribution made on his or her behalf under the plan. The default 
election ceases to apply with respect to an eligible employee if the 
employee makes an affirmative election (that remains in effect) to--
    (A) Have elective contributions made in a different amount on his 
or her behalf (in a specified amount or percentage of compensation); or
    (B) Not have any elective contributions made on his or her behalf.
    (iii) Exception for certain current employees. An automatic 
contribution arrangement will not fail to be a qualified automatic 
contribution arrangement merely because the default election provided 
under paragraph (j)(1)(i) of this section is not applied to an employee 
who was an eligible employee under the cash or deferred arrangement (or 
a predecessor arrangement) immediately prior to the effective date of 
the qualified automatic contribution arrangement and on that effective 
date had an affirmative election in effect (that remains in effect) 
to--
    (A) Have elective contributions made on his or her behalf (in a 
specified amount or percentage of compensation); or
    (B) Not have elective contributions made on his or her behalf.
    (2) Qualified percentage--(i) In general. A percentage is a 
qualified percentage only if it--
    (A) Is uniform for all employees (except to the extent provided in 
paragraph (j)(2)(iii) of this section);
    (B) Does not exceed 10 percent; and
    (C) Satisfies the minimum percentage requirements of paragraph 
(j)(2)(ii) of this section.
    (ii) Minimum percentage requirements--(A) Initial-period 
requirement. The minimum percentage requirement of this paragraph 
(j)(2)(ii)(A) is satisfied only if the percentage that applies for the 
period that begins when the employee first participates in the 
automatic contribution arrangement that is a qualified automatic 
contribution arrangement and ends on the last day of the following plan 
year is at least 3 percent.
    (B) Second-year requirement. The minimum percentage requirement of 
this paragraph (j)(2)(ii)(B) is satisfied only if the percentage that 
applies for the plan year immediately following the last day described 
in paragraph (j)(2)(ii)(A) of this section is at least 4 percent.
    (C) Third-year requirement. The minimum percentage requirement of 
this paragraph (j)(2)(ii)(C) is satisfied only if the percentage that 
applies for the plan year immediately following the plan year described 
in paragraph (j)(2)(ii)(B) of this section is at least 5 percent.
    (D) Later years requirement. A percentage satisfies the minimum 
percentage requirement of this paragraph (j)(2)(ii)(D) only if the 
percentage that applies for all plan years following the plan year 
described in paragraph (j)(2)(ii)(C) of this section is at least 6 
percent.
    (iii) Exception to uniform percentage requirement. A plan does not 
fail to satisfy the uniform percentage requirement of paragraph 
(j)(2)(i)(A) of this section merely because--
    (A) The percentage varies based on the number of years an eligible 
employee has participated in the automatic contribution arrangement 
intended to be a qualified automatic contribution arrangement;
    (B) The rate of elective contributions under a cash or deferred 
election that is in effect immediately prior to the effective date of 
the default percentage under the qualified automatic contribution 
arrangement is not reduced;
    (C) The rate of elective contributions is limited so as not to 
exceed the limits of sections 401(a)(17), 402(g) (determined with or 
without catch-up contributions described in section 402(g)(1)(C) or 
402(g)(7)), and 415; or
    (D) The default election provided under paragraph (j)(1)(i) of this 
section is not applied during the period an employee is not permitted 
to make elective contributions in order for the plan to satisfy the 
requirements of Sec.  1.401(k)-1(d)(3)(iv)(E)(2).
    (k) Modifications to contribution requirements and notice 
requirements for automatic contribution safe harbor--(1) In general. A 
cash or deferred arrangement satisfies the contribution requirements of 
this paragraph (k) only if it satisfies the contribution requirements 
of either paragraph (b) or (c) of this section, as modified by the 
rules of paragraphs (k)(2) and (k)(3) of this section. In addition, a 
cash or deferred arrangement described in paragraph (j) of this section 
satisfies the notice requirement of section 401(k)(13)(E) only if the 
notice satisfies the additional requirements of paragraph (k)(4) of 
this section.
    (2) Lower matching requirement. In applying the requirement of 
paragraph (c) of this section, in the case of a cash or deferred 
arrangement described in paragraph (j) of this section, the basic 
matching formula is modified so that each eligible NHCE must receive 
the sum of--
    (i) 100 percent of the employee's elective contributions that do 
not exceed 1 percent of the employee's safe harbor compensation; and
    (ii) 50 percent of the employee's elective contributions that 
exceed 1 percent of the employee's safe harbor compensation but that do 
not exceed 6 percent of the employee's safe harbor compensation.
    (3) Modified nonforfeiture requirement. A cash or deferred 
arrangement described in paragraph (j) of this section will not fail to 
satisfy the requirements of paragraph (b) or (c) of this section, as 
applicable, merely because the safe harbor contributions are not 
qualified nonelective contributions or qualified matching contributions 
provided that--
    (i) The contributions are subject to the withdrawal restrictions 
set forth in Sec.  1.401(k)-1(d); and
    (ii) Any employee who has completed 2 years of service (within the 
meaning of section 411(a)) has a nonforfeitable right to the account 
balance attributable to the safe harbor contributions.
    (4) Additional notice requirements--(i) In general. A notice 
satisfies the requirements of this paragraph (k)(4) only if it includes 
the additional information described in paragraph (k)(4)(ii) of this 
section and satisfies the timing requirements of paragraph (k)(4)(iii) 
of this section.
    (ii) Additional information. A notice satisfies the additional 
information requirement of this paragraph (k)(4)(ii) only if it 
explains--

[[Page 63152]]

    (A) The level of elective contributions, which will be made on the 
employee's behalf if the employee does not make an affirmative 
election;
    (B) The employee's right under the automatic contribution 
arrangement to elect not to have elective contributions made on the 
employee's behalf (or to elect to have such contributions made in a 
different amount or percentage of compensation); and
    (C) How contributions under the automatic contribution arrangement 
will be invested (including, in the case of an arrangement under which 
the employee may elect among 2 or more investment options, how 
contributions made under the automatic contribution arrangement will be 
invested in the absence of an investment election by the employee).
    (iii) Timing requirements. A notice satisfies the timing 
requirements of this paragraph (k)(4)(iii) only if it is provided 
sufficiently early so that the employee has a reasonable period of time 
after receipt of the notice and before the first elective contribution 
is made under the arrangement to make the elections described under 
paragraph (k)(4)(ii)(B) and (C) of this section.
* * * * *
    Par. 6. Section 1.401(k)-6 is amended by revising the last sentence 
in the definition of ``Qualified matching contributions (QMACs)'' to 
read as follows:


Sec.  1.401(k)-6  Definitions.

* * * * *
    Qualified matching contributions (QMACs). * * * See also Sec.  
1.401(k)-2(b)(4)(iii) for a rule providing that a matching contribution 
does not fail to qualify as a QMAC solely because it is forfeitable 
under section 411(a)(3)(G) as a result of being a matching contribution 
with respect to an excess deferral, excess contribution, excess 
aggregate contribution, or it is forfeitable under Sec.  1.414(w)-
1(d)(2).
* * * * *
    Par. 7. Section 1.401(m)-0 is amended to read as follows:
    Adding an entry for Sec.  1.401(m)-2(b)(4)(iii).


Sec.  1.401(m)-0  Table of Contents.

* * * * *
Sec.  1.401(m)-2 ACP Test.
* * * * *
    (b) * * *
    (2) * * *
    (iv) * * *
    (A) * * *
    (D) Plan years before 2008.
* * * * *
    (4) * * *
    (iii) Special rule for eligible automatic contribution 
arrangements.
* * * * *
    Par. 8. Section 1.401(m)-1 is amended by:
    1. Revising paragraph (b)(1)(iii) and adding paragraph (b)(1)(iv).
    2. Revising the last sentence of paragraph (b)(4)(iii)(B).
    3. Revising the fifth sentence of paragraph (c)(2).
    The additions and revisions read as follows:


Sec.  1.401(m)-1  Employee contributions and matching contributions.

* * * * *
    (b) * * *
    (1) * * *
    (iii) The ACP safe harbor provisions of section 401(m)(12) 
described in Sec.  1.401(m)-3; or
    (iv) The SIMPLE 401(k) provisions of sections 401(k)(11) and 
401(m)(10) described in Sec.  1.401(k)-4.
* * * * *
    (b) * * *
    (4) * * *
    (iii) * * *
    (B) Arrangements with inconsistent ACP testing methods. * * * 
Similarly, an employer may not aggregate a plan (within the meaning of 
Sec.  1.410(b)-7) that is using the ACP safe harbor provisions of 
section 401(m)(11) or 401(m)(12) and another plan that is using the ACP 
test of section 401(m)(2).
* * * * *
    (c) * * *
    (2) Plan provision requirement. * * * Similarly, a plan that uses 
the safe harbor method of section 401(m)(11) or 401(m)(12), as 
described in paragraphs (b)(1)(ii) and (b)(1)(iii) of this section, 
must specify the default percentages that apply for the plan year and 
whether the safe harbor contribution will be the nonelective safe 
harbor contribution or the matching safe harbor contribution and is not 
permitted to provide that ACP testing will be used if the requirements 
for the safe harbor are not satisfied. * * *
* * * * *
    Par. 9. Section 1.401(m)-2 is amended by:
    1. Revising the first and second sentences of paragraph (a)(5)(iv).
    2. Revising paragraph (a)(5)(v).
    3. Adding a new sentence to the end of paragraph (a)(6)(ii).
    4. Revising paragraphs (b)(2)(iv)(A) and (b)(2)(iv)(D).
    5. Removing paragraph (b)(2)(iv)(E).
    6. Revising paragraph (b)(2)(vi)(A).
    7. Adding a new sentence to the beginning of paragraph 
(b)(2)(vi)(B).
    8. Adding paragraph (b)(4)(iii).
    The additions and revisions to read as follows:


Sec.  1.401(m)-2  ACP test.

    (a) * * *
    (5) * * *
    (iv) Matching contributions taken into account. A plan that 
satisfies the ACP safe harbor requirements of section 401(m)(11) or 
401(m)(12) for a plan year but nonetheless must satisfy the 
requirements of this section because it provides for employee 
contributions for such plan year is permitted to apply this section 
disregarding all matching contributions with respect to all eligible 
employees. In addition, a plan that satisfies the ADP safe harbor 
requirements of Sec.  1.401(k)-3 for a plan year using qualified 
matching contributions but does not satisfy the ACP safe harbor 
requirements of section 401(m)(11) or 401(m)(12) for such plan year is 
permitted to apply this section by excluding matching contributions 
with respect to all eligible employees that do not exceed 4 percent 
(3.5 percent in the case of a plan that satisfies the ADP safe harbor 
under section 401(k)(13)) of each employee's compensation. * * *
    (v) Treatment of forfeited matching contributions. A matching 
contribution that is forfeited because the contribution to which it 
relates is treated as an excess contribution, excess deferral, excess 
aggregate contribution, or a default elective contribution that is 
distributed under section 414(w), is not taken into account for 
purposes of this section.
* * * * *
    (6) * * *
    (ii) Elective contributions taken into account under the ACP test. 
* * * In addition, for plan years ending on or after November 8, 2007, 
elective contributions which are not permitted to be taken into account 
for the ADP test for the plan year under Sec.  1.401(k)-2(a)(5)(ii), 
(iii), (v), or (vi) are not permitted to be taken into account for the 
ACP test.
* * * * *
    (b) * * *
    (2) * * *
    (iv) Income allocable to excess aggregate contributions--(A) 
General rule. For plan years beginning on or after January 1, 2008, the 
income allocable to excess aggregate contributions is equal to the 
allocable gain or loss through the end of the plan year. See paragraph 
(b)(2)(iv)(D) of this section for rules that apply to plan years 
beginning before January 1, 2008.
* * * * *
    (D) Plan years before 2008. For plan years beginning before January 
1, 2008,

[[Page 63153]]

the income allocable to excess aggregate contributions is determined 
under Sec.  1.401(m)-2(b)(2)(iv) (as it appeared in the April 1, 2007, 
edition of 26 CFR part 1).
* * * * *
    (vi) Tax treatment of corrective distributions--(A) Corrective 
distributions for plan years beginning on or after January 1, 2008. 
Except as otherwise provided in this paragraph (b)(2)(vi), for plan 
years beginning on or after January 1, 2008, a corrective distribution 
of excess aggregate contributions (and allocable income) is includible 
in the employee's gross income in the taxable year of the employee in 
which distributed. The portion of the distribution that is treated as 
an investment in the contract and is therefore not subject to tax under 
section 72 is determined without regard to any plan contributions other 
than those distributed as excess aggregate contributions. Regardless of 
when the corrective distribution is made, it is not subject to the 
early distribution tax of section 72(t). See paragraph (b)(4) of this 
section for additional rules relating to the employer excise tax on 
amounts distributed more than 2\1/2\ months (6 months in the case of a 
plan that includes an eligible automatic contribution arrangement 
within the meaning of section 414(w)) after the end of the plan year. 
See also Sec.  1.402(c)-2, A-4 prohibiting rollover of distributions 
that are excess aggregate contributions.
    (B) Corrective distributions for plan years beginning before 
January 1, 2008. The tax treatment of corrective distributions for plan 
years beginning before January 1, 2008, is determined under Sec.  
1.401(m)-2(b)(2)(vi) (as it appeared in the April 1, 2007, edition of 
26 CFR Part 1). * * *
    (4) * * *
    (iii) Special rule for eligible automatic contribution 
arrangements. In the case of a plan that includes an eligible automatic 
contribution arrangement (within the meaning of section 414(w)), 6 
months is substituted for 2\1/2\ months in paragraph (b)(4)(i) of this 
section.
* * * * *
    Par. 10. Section 1.401(m)-3 is amended by:
    1. Revising paragraph (a).
    2. Revising the first sentences of paragraphs (f)(1) and (j)(3).
    The additions and revisions to read as follows:


Sec.  1.401(m)-3  Safe harbor requirements.

    (a) ACP test safe harbor--(1) Section 401(m)(11) safe harbor. 
Matching contributions under a plan satisfy the ACP safe harbor 
provisions of section 401(m)(11) for a plan year if the plan satisfies 
the safe harbor contribution requirement of paragraph (b) or (c) of 
this section for the plan year, the limitations on matching 
contributions of paragraph (d) of this section, the notice requirement 
of paragraph (e) of this section, the plan year requirements of 
paragraph (f) of this section, and the additional rules of paragraphs 
(g), (h) and (j) of this section, as applicable.
    (2) Section 401(m)(12) safe harbor. For a plan year beginning on or 
after January 1, 2008, matching contributions under a plan satisfy the 
ACP safe harbor provisions of section 401(m)(12) for a plan year if the 
matching contributions are made with respect to a qualified automatic 
contribution arrangement described in paragraph Sec.  1.401(k)-3(j) 
that satisfies the safe harbor requirements of Sec.  1.401(k)-3, the 
limitations on matching contributions of paragraph (d) of this section, 
the notice requirement of paragraph (e) of this section, the plan year 
requirements of paragraph (f) of this section, and the additional rules 
of paragraphs (g), (h) and (j) of this section, as applicable.
    (3) Requirements applicable to safe harbor contributions. Pursuant 
to sections 401(k)(12)(E)(ii) and 401(k)(13)(D)(iv), the safe harbor 
contribution requirement of paragraph (b) or (c) of this section, and 
Sec.  1.401(k)-3(k) must be satisfied without regard to section 401(l). 
The contributions made under paragraphs (b) and (c) of this section, 
and Sec.  1.401(k)-3(k) are referred to as safe harbor nonelective 
contributions and safe harbor matching contributions.
* * * * *
    (f) Plan year requirement--(1) General rule. Except as provided in 
this paragraph (f) or in paragraph (g) of this section, a plan will 
fail to satisfy the requirements of section 401(m)(11), section 
401(m)(12), and this section unless plan provisions that satisfy the 
rules of this section are adopted before the first day of that plan 
year and remain in effect for an entire 12-month plan year. * * *
* * * * *
    (j) * * *
    (3) Early participation rules. Section 401(m)(5)(C) and Sec.  
1.401(m)-2(a)(1)(iii)(A), which provide an alternative 
nondiscrimination rule for certain plans that provide for early 
participation, do not apply for purposes of section 401(m)(11), section 
401(m)(12), and this section. * * *
* * * * *
    Par. 11. Section 1.402(c)-2, A-4 is amended by redesignating 
paragraph (i) as (j) and adding a new paragraph (i) to read as follows:


Sec.  1.402(c)-2  Eligible rollover distributions, questions and 
answers.

* * * * *
    A-4 * * *
    (i) A distribution that is a permissible withdrawal from an 
eligible automatic contribution arrangement within the meaning of 
section 414(w).
* * * * *
    Par. 12. Section 1.411(a)-4 is amended by revising paragraph (b)(7) 
to read as follows:


Sec.  1.411(a)-4  Forfeitures, suspensions, etc.

* * * * *
    (b) * * *
    (7) Certain matching contributions. A matching contribution (within 
the meaning of section 401(m)(4)(A) and Sec.  1.401(m)-1(a)(2)) is not 
treated as forfeitable even if under the plan it may be forfeited under 
Sec.  1.401(m)-2(b)(1) because the contribution to which it relates is 
treated as an excess contribution (within the meaning of Sec.  
1.401(k)-2(b)(2)(ii) and 1.401(k)-6), excess deferral (within the 
meaning of Sec.  1.402(g)-1(e)(1)(iii)), excess aggregate contribution 
(within the meaning of Sec.  1.401(m)-5), or default elective 
contributions (within the meaning of Sec.  1.414(w)-1(e)) that are 
withdrawn in accordance with the requirements of Sec.  1.414(w)-1(c).
    Par. 13. Section 1.414(w)-1 is added to read as follows:


Sec.  1.414(w)-1  Permissible Withdrawals from Eligible Automatic 
Contribution Arrangements.

    (a) Overview. Section 414(w) provides rules under which certain 
employees are permitted to elect to make a withdrawal from an eligible 
automatic contribution arrangement. This section sets forth the rules 
applicable to permissible withdrawals from an eligible automatic 
contribution arrangement within the meaning of section 414(w). 
Paragraph (b) of this section defines an eligible automatic 
contribution arrangement. Paragraph (c) of this section describes a 
permissible withdrawal and addresses which employees are eligible to 
elect a withdrawal, the timing of the withdrawal election, and the 
amount of the withdrawal. Paragraph (d) of this section describes the 
tax and other consequences of the withdrawal. Paragraph (e) of this 
section includes the definitions applicable to this section.
    (b) Eligible automatic contribution arrangement--(1) In general. An 
eligible automatic contribution arrangement is

[[Page 63154]]

an automatic contribution arrangement under an applicable employer plan 
that, for the plan year, satisfies the uniformity requirement under 
paragraph (b)(2) of this section, the notice requirement under 
paragraph (b)(3) of this section, and the default investment 
requirement under (b)(4) of this section.
    (2) Uniformity requirement. An eligible automatic contribution 
arrangement must provide that the default elective contribution is a 
uniform percentage of compensation. An arrangement does not violate the 
uniformity requirement of this paragraph (b)(2) merely because the 
percentage varies in a manner that is permitted under Sec.  1.401(k)-
3(j)(2)(iii), except that the rules of Sec. Sec.  1.401(k)-
3(j)(2)(iii)(A) and 1.401(k)-3(j)(2)(iii)(B) are applied without regard 
to whether the arrangement is intended to be a qualified automatic 
contribution arrangement.
    (3) Notice requirement--(i) General rule. The notice requirement of 
this paragraph (b)(3) is satisfied for a plan year if each eligible 
employee is given notice of the employee's rights and obligations under 
the arrangement. The notice must be sufficiently accurate and 
comprehensive to apprise the employee of such rights and obligations, 
and be written in a manner calculated to be understood by the average 
employee to whom the arrangement applies. The notice must be in 
writing, however, see Sec.  1.401(a)-21 for rules permitting the use of 
electronic media to provide applicable notices.
    (ii) Content requirement. The notice must include the provisions 
found in Sec.  1.401(k)-3(d)(2)(ii) to the extent those provisions 
apply to the arrangement. A notice is not considered sufficiently 
accurate and comprehensive unless the notice accurately describes--
    (A) The level of elective contributions which will be made on the 
employee's behalf if the employee does not make an affirmative 
election;
    (B) The employee's rights to elect not to have default elective 
contributions made to the plan on his or her behalf or to have a 
different percentage of compensation or amount of elective 
contributions made to the plan on his or her behalf;
    (C) How contributions made under the arrangement will be invested 
in the absence of any investment election by the employee; and
    (D) The employee's rights to make a permissible withdrawal, if 
applicable, and the procedures to elect such a withdrawal.
    (iii) Timing--(A) General rule. The timing requirement of this 
paragraph (b)(3)(iii) is satisfied if the notice is provided within a 
reasonable period before the beginning of each plan year (or, in the 
year an employee becomes an eligible employee, within a reasonable 
period before the employee becomes an eligible employee). In addition, 
a notice satisfies the timing requirements of paragraph (b)(3) of this 
section only if it is provided sufficiently early so that the employee 
has a reasonable period of time after receipt of the notice and before 
the first elective contribution is made under the arrangement to make 
the election described under paragraph (b)(ii)(A) of this section.
    (B) Deemed satisfaction of timing requirement. The timing 
requirement of this paragraph (b)(3)(iii) is satisfied if at least 30 
days (and no more than 90 days) before the beginning of each plan year, 
the notice is given to each eligible employee for the plan year. In the 
case of an employee who does not receive the notice within the period 
described in the previous sentence because the employee becomes an 
eligible employee after the 90th day before the beginning of the plan 
year, the timing requirement is deemed to be satisfied if the notice is 
provided no more than 90 days before the employee becomes an eligible 
employee (and no later than the date the employee becomes an eligible 
employee).
    (4) Default investment requirement. To the extent the plan is 
subject to Title I of ERISA, default elective contributions under an 
eligible automatic contribution arrangement must be invested in 
accordance with regulations prescribed by the Secretary of Labor under 
section 404(c)(5) of ERISA.
    (c) Permissible withdrawal--(1) In general. If the plan provides, 
any employee who has default elective contributions made under the 
eligible automatic contribution arrangement may elect to make a 
withdrawal of such contributions (and earnings attributable thereto) in 
accordance with the requirements of this paragraph (c). An applicable 
employer plan that includes an eligible automatic contribution 
arrangement will not fail to satisfy the prohibition on in-service 
withdrawals under sections 401(k)(2)(B), 403(b)(7), 403(b)(11), or 
457(d)(1) merely because it permits withdrawals that satisfy the timing 
requirement of paragraph (c)(2) of this section and the amount 
requirement of paragraph (c)(3) of this section.
    (2) Timing. The election to withdraw default elective contributions 
must be made no later than 90 days after the date of the first default 
elective contribution under the eligible automatic contribution 
arrangement. The date of the first default elective contribution is the 
date that the compensation that is subject to the cash or deferred 
election would otherwise have been included in gross income. The 
effective date of an election described in this paragraph (c)(2) cannot 
be later than the last day of the payroll period that begins after the 
date the election is made.
    (3) Amount of distributions--(i) In general. A distribution 
satisfies the requirement of this paragraph (c)(3) if the distribution 
is equal to the amount of default elective contributions made under the 
eligible automatic contribution arrangement through the effective date 
of the election described in paragraph (c)(2) of this section (adjusted 
for allocable gains and losses to the date of distribution). If default 
elective contributions are separately accounted for in the 
participant's account, the amount of the distribution will be the total 
amount in that account. However, if default elective contributions are 
not separately accounted for under the plan, the amount of the 
allocable gains and losses will be determined under rules similar to 
those provided under Sec.  1.401(k)-2(b)(2)(iv) for the distribution of 
excess contributions.
    (ii) Fees. The distribution amount as determined under this 
paragraph (c)(3) may be reduced by any generally applicable fees. 
However, the plan may not charge a different fee for a distribution 
under section 414(w) than applies to other distributions.
    (d) Consequences of the withdrawal--(1) Income tax consequences--
(i) Year of inclusion. The amount of the withdrawal is includible in 
the eligible employee's gross income for the taxable year in which the 
distribution is made. However, the portion of the distribution 
consisting of designated Roth contributions is not included in an 
employee's gross income a second time. The portion of the withdrawal 
that is treated as an investment in the contract is determined without 
regard to any plan contributions other than those distributed as 
withdrawal default elective contributions.
    (ii) No additional tax on early distributions from qualified 
retirement plans. The withdrawal is not subject to the additional tax 
under section 72(t).
    (iii) Reporting. The amount of the withdrawal is reported on Form 
1099-R, Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., as described in the 
applicable instructions.
    (2) Forfeiture of matching contributions. In the case of any 
withdrawal made under paragraph (c) of

[[Page 63155]]

this section, employer matching contributions with respect to the 
amount withdrawn must be forfeited.
    (3) Consent rules. A withdrawal made under paragraph (c) of this 
section may be made without regard to any notice or consent otherwise 
required under section 401(a)(11) or 417.
    (e) Definitions. Unless indicated otherwise, the following 
definitions apply for purposes of section 414(w) and this section.
    (1) Applicable employer plan. An applicable employer plan means a 
plan that--
    (i) Is qualified under section 401(a);
    (ii) Satisfies the requirements of section 403(b); or
    (iii) Is a section 457(b) eligible governmental plan described in 
Sec.  1.457-2(f).
    (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) Default elective contributions. Default elective contributions 
means contributions made at a specified level or amount under an 
automatic contribution arrangement that are--
    (i) Contributions described in section 402(g)(3)(A) or 
402(g)(3)(C); or
    (ii) Contributions made pursuant to a cash or deferred election 
within the meaning of section 457(b)(4) where the contributions are 
under a section 457(b) eligible governmental plan.
    (4) Eligible employee. An eligible employee means an employee who 
is eligible to make a cash or deferred election under the plan.
    (f) Effective date. Section 414(w) and this section apply to plan 
years beginning on or after January 1, 2008.
* * * * *

PART 54--EXCISE TAXES. PENSIONS, REPORTING AND RECORDKEEPING 
REQUIREMENTS

    Par. 14. The authority citation for part 54 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 15. Section 54.4979-1(c)(1) is amended by:
    Revising the first and second sentences of paragraph (c)(1) to read 
as follows:


Sec.  54.4979-1  Excise tax on certain excess contributions and excess 
aggregate contributions.

* * * * *
    (c) No tax when excess distributed within 2\1/2\ months of close of 
year or additional employer contributions made--(1) General rule. No 
tax is imposed under this section on any excess contribution or excess 
aggregate contribution, as the case may be, to the extent the 
contribution (together with any income allocable thereto) is corrected 
before the close of the first 2\1/2\ months of the following plan year 
(6 months in the case of a plan that includes an eligible automatic 
contribution arrangement within the meaning of section 414(w)). 
Qualified nonelective contributions and qualified matching 
contributions taken into account under Sec.  1.401(k)-2(a)(6) of this 
Chapter or qualified nonelective contributions or elective 
contributions taken into account under Sec.  1.401(m)-2(a)(6) of this 
Chapter for a plan year may permit a plan to avoid excess contributions 
or excess aggregate contributions, respectively, even if made after the 
close of the 2\1/2\ month period (6 months in the case of a plan that 
includes an eligible automatic contribution arrangement within the 
meaning of section 414(w)). * * *
* * * * *

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-21821 Filed 11-7-07; 8:45 am]
BILLING CODE 4830-01-P