IRS Boosts Tax Incentives for Retirement Savings

September 8, 2009

The IRS released several pieces of guidance Tuesday designed to boost tax incentives for retirement savings. The initiatives include expanded opportunities for automatic enrollment in 401(k) plans, vehicles for taxpayers to save their tax refunds and convert accrued vacation time into savings, and better explanations of the available options for taxpayers receiving rollover distributions from Roth and non-Roth employer plans.

Retirement Plans

The IRS issued pre-approved automatic enrollment language so that 401(k) plan sponsors will not have to seek IRS approval to adopt automatic enrollment (Notice 2009-65). The notice includes two sample plan amendments. This should allow plan sponsors to adopt automatic enrollment more quickly.

The IRS also issued guidance that will allow automatic enrollment in SIMPLE-IRAs (Notice 2009-66 and Notice 2009-67). Notice 2009-66 gives guidance for plan sponsors, and Notice 2009-67 contains a sample plan amendment.

The IRS also issued a ruling that allows 401(k) plans to institute voluntary automatic contribution increases (Revenue Ruling 2009-30). The new procedures are illustrated using two specific fact situations: One involves a basic automatic contribution arrangement, and the other involves an eligible automatic contribution arrangement described in IRC § 414(w).

Tax Refund Savings

Another new initiative announced Tuesday will allow taxpayers to purchase U.S. savings bonds with their tax refunds by checking a box on their tax return. This will be implemented in 2010, and starting in 2011 taxpayers will also be able to add co-owners to the bonds.

Converting Vacation Time Into Savings

Two new revenue rulings will allow workers who leave their jobs and receive cash payments for their unused vacation time to contribute those amounts to their 401(k) plans (Revenue Ruling 2009-31 and Revenue Ruling 2009-32).

Plain-English Explanation of Rollovers

The IRS also issued updated “plain English” explanations of the various options involved in rolling over money from a retirement plan when changing jobs that may be given to recipients of eligible rollover distributions from an employer plan to satisfy the requirements of IRC § 402(f). (Notice 2009-68). One explanation covers distributions from IRC § 402A Roth accounts and the other covers distributions not from Roth accounts.