Alert September 15, 2009

Obama Administration Issues New Guidance on Retirement Savings

The Treasury Department and Internal Revenue Service (the “IRS”) released guidance intended to promote individual retirement savings.  The guidance is part of an overall Obama Administration initiative to increase savings through 401(k) plans and IRAs, and complements elements of the Administration’s 2010 budget proposal.

Specifically, the guidance addresses the following matters:

  • Automatic Enrollment.  The new guidance expands the opportunity for employers to offer automatic enrollment in 401(k) and other retirement savings plans such as SIMPLE IRA plans.  The guidance also clarifies rules for automatic enrollment in these vehicles, and provides rules for escalating participants’ default contributions over time.  The IRS notices include sample amendments for 401(k) plans and SIMPLE IRAs covering the adoption of such automatic enrollment and escalation features.  The IRS notices explain that if an employer adopts one of these IRS sample amendments, it may continue to rely on a favorable IRS opinion, advisory or determination letter that it has already received.
  • Contribution of Unused Leave.  The IRS has provided new rules for amending tax‑qualified retirement plans in order to require or permit contribution of unused “paid time off” (i.e., payments for unused sick and vacation leave that meets certain requirements) to employees’ 401(k) plan accounts on an annual basis or upon termination of employment, subject to certain IRS limits.
  • Roll-Over Distributions.  The IRS updated the safe harbor explanations that an employer may provide to recipients of eligible roll-over distributions.  The updates are intended to encourage employees to elect to roll over distributions to an IRA or other retirement plan, instead of directly receiving the payment.
  • Explanation of Savings Options.  The IRS also created user-friendly website materials explaining retirement plan options for employers.  These materials, which can be accessed through the IRS website, are intended to assist employers in selecting the right type of retirement plans for their business and employees.
  • U.S. Savings Bond Initiative.  Beginning in early 2010, taxpayers will have the ability to use their tax refunds to directly purchase up to $5,000 of Series I U.S. savings bonds by checking a box on their tax return.
The IRS and Treasury guidance and an explanation of the overall savings initiative can be found at http://www.irs.gov/retirement.