It has been a little more than a year since the PPA was signed into law. In this series we have examined certain provisions that were effective in 2006 and 2007 and also looked down the road to what is becoming effective in 2008.

With an eye to defined contribution plans, in this article we will focus on certain provisions that will take effect in 2008 and discuss any guidance that has been released as of the writing of this article — nothing of note to date.

Perhaps the most anticipated piece of guidance concerns the qualified default investment alternative (QDIA) provisions of PPA. Guidance was supposed to be issued in February of 2007; however, it is GuideStone’s understanding that ongoing discussions regarding the appropriateness of money market funds (not currently in the list of approved qualified default investments) as QDIAs are holding up finalization.

As a reminder, the IRS has provided a page on its Web site dedicated to IRS information about the PPA. The page contains published guidance, articles and other resources useful in understanding the PPA.

Remember, while we will discuss what impacts plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), this series will seek to point out how PPA impacts 403(b) church plans. Generally, ERISA plans include 401(k) plans and other employee benefit plans used in the for-profit sector. But church plans, governmental plans and other types of benefit arrangements are not subject to ERISA.

Remember, too, that this is just a high-level overview of some of the most important provisions in PPA that impact defined contribution plans. GuideStone is continuing to study the PPA and analyze how to respond to update plan documents, notices, procedures, etc., impacted by the PPA. Since GuideStone cannot provide tax or legal advice, you are always encouraged to consult with your organization's tax or legal advisers regarding the impact of the PPA upon your organization and its plans. However, we encourage you to become familiar with these new provisions and contact your relationship manager with questions regarding the PPA and its impact on your retirement plan.

Items Impacting Both 403(b) Church Plans and Plans Subject to ERISA Effective in 2008

Qualified Automatic Contribution Arrangements (QACAs) — The PPA created the QACA as one of a series of provisions designed to encourage automatic enrollment plans, an arrangement under which elective deferrals are automatically made to a retirement plan unless the participant makes a contrary election. A QACA is an automatic contribution arrangement that will satisfy the average deferral percentage test (ADP) applicable to 401(k) plans and the average contribution percentage test (ACP) applicable to both certain* 403(b) and all 401(k) plans with employer matching and/or after-tax contributions. Under a QACA, employees who do not make a contrary election will automatically have their salaries reduced by at least the amount shown in the following schedule:

These automatic deferrals cannot exceed 10% of salary.

In addition, under a QACA, for each non-highly compensated employee, the employer must make a matching contribution of 100% of elective deferrals up to 1% of an employee’s compensation and match 50% of elective deferrals up to the next 5% of an employee’s compensation — essentially a matching contribution of up to 3.5% of compensation. Alternatively, an employer can make a 3% nonelective contribution for each non-highly compensated employee. Special vesting and withdrawal restrictions apply to these employer contributions.

QACAs are also subject to special notice requirements. Essentially, a notice must be provided within a reasonable period of time prior to each plan year and must be provided to each newly eligible employee within a reasonable amount of time before the first automatic reduction is made from the employee’s pay. Specific content requirements apply to the notice.

Finally, a QACA can be structured to exclude employees who were eligible immediately before the QACA is put in place.

GuideStone is reviewing these new provisions to determine how to respond and whether the 403(b) plans serviced by GuideStone should be updated for QACAs. Look for more information about QACAs as guidance is issued.

* Generally only 403(b) plans of employers such as universities, colleges, hospitals, and retirement and children’s homes that receive large amounts of funding from other than the related denomination are subject to the ACP test.

Withdrawal of Contributions from Eligible Automatic Contribution Arrangements (EACAs) — One of the drawbacks to implementing automatic contribution arrangements is the possibility of small account balances left in plans if participants opt out of the automatic contribution arrangement after only a few contributions are made. To address that drawback, the PPA provides requirements under which “erroneous” automatic contributions can be withdrawn from EACAs. EACAs are automatic contribution arrangements that satisfy certain notice and Department of Labor default-investment requirements. An EACA can be, but does not have to be, a QACA. As provided by the PPA, if a participant in an EACA requests a distribution within 90 days of the first automatic contribution under the plan, the erroneous automatic contribution can be withdrawn without violating any restriction on the distribution of elective deferrals. There is no 10% penalty on the distribution and employer-matching contributions made because the erroneous automatic contribution(s) may be forfeited.

More Time to Correct ADP/ACP Failures without Penalty in EACA — As another inducement for employers to sponsor EACAs, the PPA expands the time frame in which corrective distributions for failed ADP and ACP tests can be made from EACAs. For plan years beginning after 2007, EACA plans will have six (6) months in which to make corrective distributions to cure failed ADP and/or ACP tests without the employer incurring a 10% penalty on the amount of the corrective distribution. As mentioned above, EACAs are automatic contribution arrangements that satisfy certain notice and Department of Labor default investment requirements.

Tax Year of Inclusion of ADP/ACP Corrective Distributions — For all plans (not just EACAs or QACAs) subject to retirement plan nondiscrimination testing, for plan years beginning after 2007, any corrective distribution of a failed ADP/ACP test will be taxable to the employee in the year of distribution. Currently corrective distributions of failed ADP/ACP tests made within 2½ months of the end of the plan year for which the test is performed are taxable for the year of the excess (the prior tax year).

No Gap-Period Income on ADP/ACP Corrective Distributions — Beginning with corrective distributions of failed ADP/ACP tests for the 2008 plan year (to be made in 2009), gap-period income, the income between the end of the plan year being tested and the time of the distributions, will no longer have to be included in the corrective distribution. This provision applies to all plans, not just EACA or QACA plans.

Rollovers from 403(b) and 401(k) Plans to Roth IRA — Beginning in 2008, plan participants who take distributions from 403(b) or 401(k) plans will be able to roll those distributions directly from those plans into a Roth IRA. These direct rollovers are only available to participants whose adjusted gross income is $100,000 or less. The taxable amount of the distribution from the 403(b) or 401(k) plan must be included in income, but the 10% penalty on early distributions does not apply.

Items Impacting Only Plans Subject to ERISA Effective in 2008

Publish 5500 on Employer Intranet — Regulations have not yet been issued, but beginning with the 5500 for the 2008 plan year, the 5500 will have to be posted on the employer’s intranet site for viewing by employees.

As 2008 approaches, most of the major provisions of PPA impacting defined contribution plans will have become effective. While all of the provisions of PPA impacting defined contributions may not apply or be of interest with respect to your plan(s), in this Mile Marker series GuideStone has tried to inform you of the major provisions in which you might be interested. While the Mile Marker series is coming to a close with this article, as we move into 2008, we will continue to keep you apprised of any areas of PPA which may be of interest to sponsors of defined contribution plans.

If you would like additional information on this topic, please email us or call 1-888-98-GUIDE (1-888-984-8433).