IRS adds easier correction methods for automatic contribution elective deferral plans

The IRS has modified its Employee Plans Compliance Resolution System (EPCRS) procedures to include new safe harbor correction methods relating to automatic contribution features (including automatic enrollment and automatic escalation of elective deferrals) in 401(k) and 403(b) plans, and special safe harbor correction methods for plans (including those with automatic contribution features) that have short-term elective deferral failures. Rev. Proc. 2013-12 is modified effective April 2, 2015.

The IRS explains that it has received comments requesting special correction methods with respect to a failure to implement automatic contribution features in 401(k) and 403(b) plans. Commenters have stated that the cost associated with correcting failures to implement automatic contribution features under the current rules in EPCRS, as set forth in Rev. Proc. 2013-12, 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). The commenters noted that implementation errors typically are discovered in connection with the preparation of a plan’s Form 5500 series return/report for a plan year. In addition, commenters thought that current EPCRS safe harbor correction methods for the exclusion of eligible employees, or for failing to implement a salary reduction election, create a “windfall” for affected employees because those employees receive both their full salary and a 50% make-up corrective contribution.

Failure to implement automatic contribution or employee’s elective deferral in plan that has automatic contribution feature

Under the safe harbor, if the failure to implement an automatic contribution feature or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9½-month period after the end of the plan year of the failure, no qualified nonelective contribution (QNEC) for the missed elective deferrals is required, provided that the following conditions are satisfied: (a) correct deferrals begin no later than the earlier of (i) the first payment of compensation made on or after the last day of the 9½-month period after the end of the plan year in which the failure first occurred, or (ii) if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification; (b) notice of the failure that satisfies specified requirements is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and (c) corrective contributions to make up for any missed matching contributions are made in accordance with timing requirements under the Self-Correction Program for significant operational failures and are adjusted for earnings. This safe harbor correction method is available only for plans with respect to failures that begin on or before December 31, 2020. At a later date, the IRS will consider whether to extend the safe harbor correction method for failures that begin in later years. An alternative safe harbor earnings calculation method is provided.

Short-term elective deferral failures for plans with automatic contribution feature

A rolling correction period is available for employee elective deferral failures that do not exceed three months. No QNEC for the missed elective deferrals is required provided that the correct deferrals begin no later than the earlier of: (i) the first payment of compensation made on or after the three-month period that begins when the failure first occurred for the affected eligible employee; or (ii) if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification. Notice must be provided that satisfies specified requirements to the affected eligible employee not later than 45 days after the date on which correct deferrals begin, and corrective contributions adjusted for earnings must be made in accordance with timing requirements under Self-Correction Program for significant operational failures. An alternative safe harbor earnings calculation method is provided.

Longer-term failures

Elective deferral failures extending beyond three months but not beyond the Self-Correction Program correction period for significant failures can be corrected by a contribution equal to 25-percent of the missed deferrals (25-percent QNEC). To qualify, the plan sponsor must begin correct deferrals no later than the earlier of: (i) the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred; or (ii) if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification. Notice must be provided that satisfies specified requirements to the affected eligible employee not later than 45 days after the date on which correct deferrals begin, and corrective contributions adjusted for earnings (including the 25-percent QNEC and employer contributions to make up for any missed matching contributions) must be made.

Elective deferral failures for these purposes include a failure to correctly implement elective deferrals in a 401(k) and 403(b) plan, including elective deferrals pursuant to an affirmative election or pursuant to an automatic contribution feature (including an automatic escalation feature) and a failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan.

Source: IRS Rev. Proc. 2015-28.

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