Obama Administration Launches Retirement Savings Initiatives

With 401(k) Day less than a week away (September 11), and the Labor Day weekend upon us, President Obama’s weekly radio address was titled “Labor Day and Fair Rewards for Hard Work.”  Along with that address, the President and Treasury Secretary Tim Geithner announced “new steps to make it easier for American families to save for retirement.” 

And while health-care reform and concerns about looming federal budget deficits seem to be consuming most of the “oxygen” in the nation’s capital, the White House noted that the initiatives unveiled Saturday “will complement the president’s major legislative proposals to boost participation in IRAs and match retirement savings.”

Specifically, the announcement said that the Department of the Treasury will:

• expand opportunities for automatic enrollment in 401(k) and other retirement savings plans;
• make it easier for more than 100 million families to save a portion or all of their tax refunds;
• enable workers to convert their unused vacation or other similar leave into additional retirement savings; and
• help workers and their employers better understand the available options for tax-favored retirement saving through clear, easy-to-understand language.

As for the specifics, the White House noted that it will streamline the process for 401(k) plans to adopt automatic enrollment.In Revenue Ruling 2009-30, the IRS outlined several ways a 401(k) plan sponsor can include automatic contribution increases in its plan.  Noting that plan sponsors typically seek Internal Revenue Service approval of plan amendments to ensure legal compliance, in Notice 2009-65, the IRS has now provided sample automatic enrollment plan language that a 401(k) plan sponsor can adopt with automatic IRS approval. 

It was also noted that Treasury and the IRS are releasing a ruling explaining how 401(k) plans can use an automatic contribution increase feature.

SIMPLE Solutions

For plan sponsors with SIMPLE IRAs, Notice 2009-66  offers guidance to help small employers add automatic enrollment to their SIMPLE IRA plans, while Notice 2009-67 provides sample automatic contribution language that a SIMPLE IRA plan sponsor can adopt with automatic IRS approval. 

Also included in the materials: "Automatic Enrollment 401(k) Plans for Small Businesses."

Saving Tax Refunds

The announcement noted that more than 100 million families receive federal income tax refunds each year—refunds that average more than $2,000, according to the IRS. 

"Taxpayers can already instruct the IRS to directly deposit their refunds and dedicate a portion to an IRA or other savings vehicle," the notice explained, but goes on to note that now taxpayers will have another savings option beginning in early 2010; the ability to use their refunds to purchase U.S. savings bonds “simply by checking a box on their tax return, without having to open an account at Treasury or take any other action, and even if the taxpayer doesn't have a bank account.” 

Taxpayers will be able to purchase bonds in their own names beginning in 2010 and to add co-owners such as children or grandchildren beginning in 2011.  The savings bonds will be mailed to the taxpayer. 

More information about that option is available here. 

Treasury and the IRS have issued two new rulings describing how employers can allow their employees to contribute unused leave and/or vacation time amounts to their 401(k) plan.

As an alternative, the rulings also give employers the option of making their own contribution of these amounts to their employees' 401(k) or other plan. 

Revenue Ruling 2009-31 addresses annual contributions of payments employees would receive for unused vacation or other similar leave to an ongoing defined contribution plan, whether as employer contributions or elective 401(k) contributions.  Meanwhile, Revenue Ruling 2009-32 addresses similar contributions at termination of employment.

Understanding Options

Employees changing jobs and receiving payments from a retirement plan face a number of choices, including a tax-free "rollover" of their benefits to another retirement account, though these choices are not always well understood. 

As a result, Treasury and the IRS have now issued what they termed a "plain-English road map for rollovers" to help workers keep their savings in tax-favored retirement plans or IRAs until they are ready to retire, rather than withdrawing cash earlier, subject to tax penalties. The road map  is an updated model notice for plans to give departing employees, and explains how to roll over plan balances, the key decisions, and the tax consequences.

Simplified Presentation

According to the announcement, Notice 2009-68 simplifies the presentation of an employee's options when receiving an eligible rollover distribution. It provides a rollover road map that satisfies the required notice that must be provided to employees taking their retirement assets, and also reflects law changes (such as information on a distribution from a designated Roth account under an employer plan) and explains rules that apply in special situations (such as when a distribution is made to a surviving spouse or other beneficiary).

In addition, the IRS has created new user-friendly Web site materials to help employers select an appropriate retirement plan and to help employees better understand the benefits of saving for retirement.

Finally, “Life Events that Can Affect Retirement Savings ”  provides more information on major life events that can affect your retirement planning like starting a job, terminating employment, and catching-up on contributions for missed years of opportunity.

The entire package with links is available here.