Senior Fellow Adds to Comments on Proposed Automatic Contribution Arrangement Regs

Sent: Wednesday, July 23, 2008 8:00 AM

To: Johnson Regina

Subject: FW: Retirement Security Project: Additional Comment on Proposed Regulations Relating to Automatic Contribution Arrangements Under IRC Section 414(w)

Importance: High

From: Iwry, J. Mark [mailto:iwryj@sullcrom.com]

Sent: Tuesday, July 22, 2008 7:40 PM

To: W.Thomas.Reeder@do.treas.gov; Weller Harlan -- OTP; Evans William -- OTP; Tawshunsky Alan; mojiri-azad@irscounsel.treas.gov; barry@irscounsel.treas.gov; gibbs@irscounsel.treas.gov; Hurst Richard A

Cc: Zuckerman Andrew E

Subject: Retirement Security Project: Additional Comment on Proved Regulations Relating to Automatic Contribution Arrangements Under IRC Section 414(w)

During the hearing at the Service on the automatic contribution proposed regulations, there was one additional legal argument regarding the mid-year Section 414(w) issue that I had intended to bring up to the panel (when testifying on behalf of the Retirement Security Project) before time ran out. I now realize I never raised this point, which is summarized below. AARP representatives have informed me that AARP concurs in this comment.

There is another reason why Treasury and the Service have the authority to interpret Section 414(w) to allow plans to begin permitting 414(w) permissible withdrawals during the middle of a plan year (provided that employees receive notice a reasonable time before the effectiveness of the plan's permissible withdrawal provision). We have argued that the statutory language of Section 414(w)(4)("within a reasonable period before each plan year") should be read in the context of the other notice provisions and other provisions of Sections 414(w), 401(k)(13), ERISA's default investment and preemption provisions, and Section 902 of the PPA, and should be interpreted in light of the legislative intent; and that the statutory language taken as a whole is not so consistent and coherent that it precludes Treasury and the Service from exercising reasonable discretion to allow permissible withdrawals to be made effective (with reasonable prior notice) at a time other than the beginning of a plan year.

That the Section 414(w) statutory language is not unidirectional and ironclad on this point is evident from the fact that Section 414(w)(5) permits Section 457 and Section 403(b) plans to use permissible withdrawals (i.e., provides that 457 and 403(b) plans can be "applicable employer plans" within the meaning of 414(w)(3)). Yet, as you know, 457 plans generally do not -- and are not required to -- use the plan year concept (as opposed to, for example, taxable years of individuals). (Also, 403(b) plans -- even under the new regulations, postdating PPA -- are not required to have plan years for Code purposes and traditionally have not necessarily been operated on a 'plan year" basis.)

Section 457 plans (and 403(b) plans) cannot reasonably be subjected to a requirement to give notice "before each plan year". Accordingly, a literalist reading of 414(w)(4) would be inconsistent with the clear application of Section 414(w) to 457 (and probably 403(b)) plans. Congress cannot reasonably be deemed to have intended to require 457 and 403(b) plans to begin operating on a plan year basis simply because they choose to allow permissible withdrawals. That Section 414(w)(4) contains no statutory exception for 457 or 403(b) plans suggests that the statutory language does not work perfectly (or was not intended to be read too literally to apply in every circumstance), and therefore can be interpreted in a reasonable manner to make it reasonably administrable for all three types of plans referred to in Section 414(w). There is no policy reason to hold 401(k) plans to a beginning-of-the-plan-year standard for permissible withdrawals based on statutory language that must in any event be interpreted more flexibly.

The final regulations should therefore allow plans to make permissible withdrawals effective at any time, provided that notice is given within a reasonable period before the beginning of each plan year or other period for which the permissible withdrawals are effective. The quoted language of 414(w)(4) can be read to refer to the annual notice required to be given to 401(k) participants on an ongoing, steady state basis, and can be interpreted somewhat more flexibly when applied to the first period (which might be a partial year) for which the permissible withdrawals are effective.

I would appreciate it if this message could to be placed in the regulation comment file (and made available to the public) in order that any interested parties, pro or con, might have access to it.