New Proposed IRS Rules and Model Notice for Automatic Contribution Arrangements
The Internal Revenue Service (IRS) issued two pieces of guidance that will help employers implement automatic contribution arrangements under the rules enacted by the Pension Protection Act (PPA). An automatic contribution arrangement (ACA) is a cash or deferred arrangement under which an eligible employee, in the absence of an affirmative election, is treated as having made an election to have a specified contribution made on his or her behalf under the plan.

First, the IRS issued proposed new rules on ACAs in 401(k) plans, 403(b) tax-sheltered annuities, or 457(b) governmental plans (72 Fed. Reg. 63144). The new rules provide a new design-based safe harbor for plans with ACAs to automatically satisfy the ADP and ACP tests. ACAs that make use of the new design-based safe harbor are called qualified automatic contribution arrangement or QACAs. The new IRS regulations also prescribe rules under which participants who are automatically enrolled in a 401(k) plan, a 403(b) plan, or a 457(b) plan may elect, without being subject to the early distribution tax, to receive a distribution equal to the amount of any default elective contributions (and related earnings) made beginning before the effective date of the default election. The election to withdraw automatic contributions must be made within 90 days after the first automatic contribution is made. ACAs that comply with the rules for withdrawing automatic contributions within the first 90 days are called eligible automatic contribution arrangements or EACAs. The regulations, as proposed, would be effective for plan years beginning on or after January 1, 2008. Employers may rely on these proposed rules pending the issuance of final regulations.

Second, to aid plan sponsors in satisfying the requirements of the IRS’s proposed ACA regulations for the 2008 plan year, the IRS posted a sample “Automatic Enrollment Notice” on its website that satisfies notice requirements applicable to a hypothetical QACA that permits EACA withdrawals and has certain other characteristics (http://www.irs.gov/pub/irs-tege/sample_notice.pdf). Annual notice requirements apply to both QACAs and EACAs. Those notices must be provided a reasonable time before the beginning of each plan year. The Department of Labor (DOL) has indicated that use of this sample notice also satisfies the notice requirements applicable to assets invested in a qualified default investment alternative (QDIA) on behalf of participants and beneficiaries who do not direct the investment of their accounts. A plan sponsor will need to add to, subtract from, or otherwise change the sample notice to the extent a plan’s form and operations differ from the hypothetical QACA described in the sample notice, so that the actual notice accurately reflects the provisions of the plan.

IRS Provides Model 403(b) Plan for Public Schools
The IRS issued Revenue Procedure 2007–71, which contains model language public school employers may use to comply with the “written plan” requirements outlined in the final 403(b) regulations issued on July 26, 2007. The deadline for complying with the final regulation’s written plan requirement is January 1, 2009.

Public school employers that do not have a written 403(b) plan may adopt the entire model plan language. Adoption of the entire model plan language on a word-for-word basis, or use of language that is substantially similar in all material respects, would give the public school employer the same protection as a private letter ruling that the written form of the plan satisfies Internal Revenue Code (IRC) § 403(b). Employers that adopt the model plan language must also operate the plan in accordance with that language and must continue to satisfy all of the other IRC § 403(b) requirements to maintain tax-qualified status for the plan. Employers that do not use the model plan language and request a private letter ruling from the IRS regarding the qualification of the written plan must clearly highlight and describe how their plan provisions differ from the model language.

In addition to the mandatory language, the model language includes several optional provisions, including automatic enrollment, exclusion of student-employees and employees who normally work less than 20 hours per week, age 50 catch-up contributions, loans, cash-outs, hardship withdrawals, rollovers, and transfers.

Although the model plan is specifically designed for public school employers, it may be adapted for use by a 501(c)(3) organization. The model plan includes commentary, identifying provisions that must be modified if adapted for use by an employer that is not a public school. However, the IRS cautions that a non-public school employer may be required to make additional modifications to the model plan to comply with IRC § 403(b) and ERISA.

IRS Adjusts Standard Auto Mileage Expense Rates
The IRS issued new standard mileage rates for taxpayer use in computing the deductible costs of the business use of automobiles. The new business standard mileage rate effective for expenses incurred on and after January 1, 2008 is $0.505 per mile. The IRS typically issues these standard rates prior to the beginning of each calendar year. The new 2008 rate is a two-cent-per-mile increase from the 2007 rate. Taxpayers may continue to use actual allowable expenses for the business use of automobiles if the taxpayer maintains adequate records and sufficient evidence for proper substantiation. The standard mileage rate for moving or medical expense purposes will decrease to $0.19 per mile from 2007’s rate of $0.20 per mile. The IRS also announced the standard mileage rate of $0.14 per mile for purposes of computing the charitable contribution deduction for use of an automobile in connection with rendering gratuitous services to a charity remains unchanged (Rev. Proc. 2007–70).

Annual Physicals, Full-Body Scans, and Pregnancy Tests are Deductible
IRC § 213 allows a deduction for unreimbursed medical care expenses incurred by a taxpayer, spouse, or dependent to the extent the expenses exceed 7.5 percent of the taxpayer’s adjusted gross income. IRC § 213 also describes the universe of health care expenses that can be reimbursed under Health Flexible Spending Accounts (Health FSAs), Health Savings Accounts (HSAs), and Health Reimbursement Arrangements (HRAs). Under IRC § 213, medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of any disease or for the purpose of affecting any structure or function of the body.

In a new IRS ruling, the IRS addresses the deductibility of certain diagnostic medical procedures. The ruling concludes that annual physical exams and full-body electronic scans are deductible medical care expenses even if the individual undergoing the procedure is not experiencing any symptoms. In connection with full-body scans, the IRS noted that such an expense is deductible even if a physician’s recommendation is not obtained before undergoing the procedure. Furthermore, the IRS ruled that neither the significant cost of full-body scans nor the existence of less expensive alternatives precludes the deduction. Pregnancy tests are deductible medical care expenses even though their purpose is to test the healthy functioning of the body rather than to detect disease. Because IRS revenue rulings are binding on the IRS, individual taxpayers and sponsors of Health FSAs, HSAs, and HRAs can safely reimburse the kinds of expenses referenced in the ruling provided, of course, that the governing plan document so provides (Revenue Ruling 2007–72).

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