IRS INFORMATION LETTER CLARIFIES CONTRIBUTION RULES FOR AUTOMATIC ENROLLMENT/COMPENSATION REDUCTION ELECTIONS

[17370] April 13, 2004 TO: PENSION MEMBERS No. 25-04 PENSION OPERATIONS ADVISORY COMMITTEE No. 31-04 RE: IRS INFORMATION LETTER CLARIFIES CONTRIBUTION RULES FOR AUTOMATIC ENROLLMENT/COMPENSATION REDUCTION ELECTIONS In the attached information letter dated March 17, 2004, the IRS clarifies the contribution rules for automatic enrollment/compensation reduction elections1 discussed in two revenue rulings, Rev. Rul. 2002-82 and Rev. Rul. 2000-353. These revenue rulings provide examples of plans including automatic enrollment elections with specified contribution percentages. The information letter clarifies that a plan’s actual contribution percentage under an automatic compensation reduction election may be more or less than the contribution percentages used in the rulings’ examples. The contribution percentage may be greater than the percentage of compensation that limits the amount of elective contributions or elective deferrals that are matched by employer matching contributions. Automatic deferrals may also increase over time according to a specified schedule. Employees must be given notices that explain the automatic compensation reduction election and the right to elect not to be subject to automatic enrollment or to contribute a lesser percentage to the plan than the percentage that otherwise would automatically be contributed (including the procedure and timing for exercising election rights). Deferrals made under an automatic compensation reduction election are also subject to the limitations imposed by sections 401(a), 401(k)(3), 402(g), 403(b), 415 or any other applicable provision of the Internal Revenue Code. Lisa Robinson Assistant Counsel 1 These elections include automatic deferrals of initial compensation and future increases in compensation, such as pay raises and bonuses. 2 See Institute Memorandum (No. 11594) to Pension Members No. 9-00 and Pension Operations Advisory Committee No. 7-00, dated February 1, 2000. 3 See Institute Memorandum (No. 12300) to Pension Members No. 37-00 and Pension Operations Advisory Committee No. 51-00, dated July 18, 2000. 2 Attachment (in .pdf format) Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website (http://members.ici.org) and search for memo 17370, or call the ICI Library at (202) 326-8304 and request the attachment for memo 17370.