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Under IRS’s Employee Plans Compliance Resolution System (EPCRS), if a 401(k) plan sponsor fails to make a contribution that an employee has elected, ‘correction’ generally requires that the sponsor, among other things, make a contribution equal to 50% of the employee’s ‘missed deferral.’ In Revenue Procedure 2015-28, released on April 2, 2015, IRS provided two new safe harbors, effectively waiving the 50%-of-missed-deferrals contribution requirement for certain failures related to automatic contributions and certain short duration failures.
In this article we describe the new safe harbors, beginning with some background on the issue.
The EPCRS generally provides methods for correcting plan errors. The type of error addressed in Revenue Procedure 2015-28 is an operational error involving the failure of the sponsor of, e.g., a 401(k) plan to implement a participant’s affirmative deferral election or, where there is an automatic enrollment or automatic escalation feature, the automatic/default deferral.
Before the publication of Revenue Procedure 2015-28, the EPCRS required, among other things, that where there was this sort of error the sponsor had to contribute an amount “equal to 50% of the employee’s ‘missed deferral’ … determined by multiplying the employee’s elected deferral percentage by the employee’s compensation … adjusted for Earnings to the date the corrective [contribution] is made ….” The theory was that this additional 50% contribution compensated the participant for the value of the lost deferral opportunity resulting from the failure.
In Revenue Procedure 2015-28, IRS stated, however, that this rule “discourages employers from adopting plans with automatic contribution features because implementation errors are more common for plans with automatic contribution features (particularly automatic escalation features).” Moreover, IRS noted, some have criticized this rule as creating “a ‘windfall’ for affected employees because those employees receive both their full salary and a 50% make-up corrective contribution.”
Revenue Procedure 2015-28 provides two additional EPCRS safe harbors that, in effect, provide relief from the 50%-of-missed-deferrals contribution requirement – one for errors associated with an automatic contribution feature and one for errors of short duration.
Failures related to automatic contributions
Under Revenue Procedure 2015-28, the EPCRS 50%-of-missed-deferrals contribution requirement does not apply to a failure “associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a § 401(k) plan or 403(b) Plan” provided that:
Correct deferrals begin no later than the compensation payment following the 9½ month period after the end of the plan year of the failure or, if earlier, the end of the month after the month the participant notified plan sponsor of the failure. (The 9½ month period after the end of the plan year generally corresponds with the due date for the Form 5500. According to IRS, “implementation errors typically are discovered in connection with the preparation of a plan’s Form 5500 ….”)
The sponsor makes any matching contributions (plus earnings) that would have been made with respect to the missed deferral.
Certain participant notice requirements are met.
This new safe harbor ‘sunsets’ (is not available for failures occurring) after the 2020 plan year. IRS stated that it “will consider whether to extend the safe harbor correction method for failures that begin in later years. In deciding whether to extend the safe harbor correction method, the Service will take into account, among other relevant factors, the extent to which there is an increase in the number of plans implemented with automatic contribution features.” In other words, this new safe harbor is clearly intended to make it easier to adopt an automatic contribution feature; if sponsors don’t respond by adopting more automatic contribution features, the relief may not be extended past 2020.
Under Revenue Procedure 2015-28, the EPCRS 50%-of-missed-deferrals contribution requirement also does not apply to certain short duration failures. No contribution is required where:
Correct deferrals begin no later than the compensation payment following “the three-month period that begins when the failure first occurred” or, if earlier, the end of the month after the month the participant notified plan sponsor of the failure.
The sponsor makes any matching contributions (plus earnings) that would have been made with respect to the missed deferral.
Certain participant notice requirements are met.
A reduced 25%-of-missed-deferrals contribution is required where the correction is not made within three months but is made by “the last day of the second plan year following the plan year in which the failure occurred,” and the matching contribution and notice requirements are met.
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The new rules under Revenue Procedure 2015-28 will make it easier (or at least less expensive) for sponsors to correct certain contribution errors, especially those related to auto-enrollment and auto-escalation programs.