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IRS Clarifies SECURE Act Changes to Qualified Automatic Contribution Arrangements

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The IRS recently published Notice 2020-86 (the “Notice”), which provides clarification with respect to certain changes made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). In particular, the Notice answers several outstanding questions related to the maximum default deferral rate for qualified automatic contribution arrangements.

As previously reported here, the SECURE Act raised the maximum permissible deferral rate for qualified automatic contribution arrangements to 15% of compensation from 10% of compensation for the second plan year and all subsequent plan years. The maximum deferral rate through the end of the first year remains set at 10% of compensation.

The Notice clarifies that employers are not required to increase the maximum qualified percentage of compensation for purposes of maintaining a qualified automatic contribution arrangement. Instead, the increased maximum default deferral rate is permissive so long as the percentage of compensation is applied uniformly, does not exceed the stated maximum percentage or fall below the required minimum percentage.

Nonetheless, the Notice indicates that plans that incorporate the maximum default deferral rate by reference to the Code may need to be amended to clarify which maximum rate applies for a given period (e.g., to provide that the plan’s maximum qualified percentage is 10% retroactive to the first day of the first plan year beginning after December 31, 2019).

The Notice also includes clarifications to changes made by the SECURE Act to the annual safe harbor notice requirements, which are generally described in our blog “Is Your Safe Harbor Section 401(k) Plan Required to Provide an Annual Notice?

The IRS indicates that this Notice is not exhaustive, and that additional guidance and regulations may be forthcoming.