IRS Boosts Tax Incentives for Retirement Savings

By Alistair M. Nevius, J.D.

The IRS has released several pieces of guidance designed to increase tax incentives for retirement savings. The initiatives include expanded opportunities for automatic enrollment in Sec. 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 preapproved 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 has also issued guidance that will allow automatic enrollment in SIMPLE IRAs (Notices 2009-66 and 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 (Rev. Rul. 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 Sec. 414(w).

Tax Refund Savings

Another new initiative 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 (Rev. Ruls. 2009-31 and 2009-32).

Plain-English Explanation of Certain Rollovers

The IRS also issued a “plain-English” roadmap explaining 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 Sec. 402(f) (Notice 2009-68). One explanation covers distributions from Sec. 402A Roth accounts, and the other covers distributions from non-Roth accounts.

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