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Member, Beacon International Group, Ltd.
WASHINGTON—New Internal Revenue Service rules will make it easier for employers to add an automatic enrollment feature to their 401(k) plans, as well as add a provision in which employees’ salary deferrals will increase automatically.
Employers who use model language included in IRS Notice 2009-65 will be able to amend their 401(k) plans to add an automatic enrollment feature without the need for approval by the IRS.
Between 40% and 50% of large employers offer automatic enrollment in their 401(k) plans. Automatic enrollment applies to employees who don’t indicate whether they want to enroll in the plan. Such employees then are automatically enrolled unless they decide to opt out.
At the same time, the IRS released Revenue Ruling 2009-30 to make clear that an automatic-contribution design in which employees’ salary deferrals will increase by the greater of a certain percentage of their salary—such as 1%—or a portion of a salary increase will pass muster.
The IRS also released Revenue Ruling 2009-31 to clarify that cash payments that would otherwise be given to terminated employees for unused vacation or other time off can be used by those employees to contribute to their 401(k) plans.
Senior Obama administration officials say the new rules are intended to boost retirement plan savings.