IRS updates retirement plan requirements for employers
The IRS has been busy when it comes to the Employee Plans Compliance Resolution System (EPCRS). In March, it released Revenue Procedure 2015-27 that overhauled the correction process for overpayments. Then in early April, the IRS released Rev. Proc. 2015-28. Effective April 2, 2015 the document describes updated Self-Correction Program (“SCP”) procedures that will provide relief to plan sponsors who fail to correctly implement employee elective deferrals.
Prior to April 2, 2015, if a plan sponsor failed to remit elective deferrals for any employees, the procedure under the SCP would require it to make a Qualified Nonelective Employer Contribution (“QNEC”) in the amount of 50% of the missed deferral amount, make up any missed match contributions and the lost earnings on the full amount of the missed deferral (not the 50% QNEC) as well as the match contribution. Many industry groups and plan sponsors viewed this as a windfall to employees due to the fact the employee still received the monies via payroll (although after taxes and not set aside in a qualified plan arrangement). There are two new safe harbor methods depending on the means of enrollment employed by the plan.
Failure to implement automatic enrollment
If a plan sponsor fails to effectuate contributions pursuant to either automatic enrollment or automatic escalation plan design features, there will no longer be a 50% QNEC if the following conditions are met:
- The failure does not extend beyond a 9 1/2 month period following the end of the plan year (which aligns with the filing deadline for the Form 5500, including automatic extensions).
- Deferrals begin, at the correct date, at the earlier of:
- The first payroll following the date above, or
- The first payroll following the end of the month after the plan administrator receives notice of the failure from the affected participant.
- The plan sponsor must notify affected participants no later than 45 days following the date the correct deferrals begin. This notice is intended for participant to be able to change their deferral rates to make up the missed contributions.
- The plan sponsor must make a QNEC for missed match contributions, plus earnings no later than the end of the second plan year following the year in which the failure first occurred.
In addition to the above, the IRS changed the way lost earnings are calculated. Going forward, if a participant did not make an affirmative investment election, the earnings may be based on the default investment option, provided that any cumulative losses will not result in a reduced QNEC.
Failure to implement elective deferral election
The IRS changed the procedure for elective deferral failures as well with the implementation of a 3-month rolling period for corrections. There will be no QNEC required for failures under the following:
Deferrals begin by the earlier of: a.) The first pay period on or after a 3-month period that begins when the failure first occurred, or b.) The first payroll following the end of the month after the plan administrator receives notice of the failure from the affected participant.
The plan sponsor must notify affected participants no later than 45 days following the date the correct deferrals begin (same as above for automatic enrollment plans).
The plan sponsor must make a QNEC for missed match contributions, plus earnings no later than the end of the second plan year following the year in which the failure first occurred.
For failures that extend beyond the rolling 3-month period described above, but corrected by the last day of the second plan year following the plan year in which the error occurred, a plan sponsor may make a 25% QNEC rather than a 50% QNEC (subject to the other requirements listed above).
The two correction methods may overlap. For example, if a participant opts out of an automatic enrollment in favor of a different deferral rate, any error would still be available for the safe harbor correction method described for automatic contribution arrangements above. However, if that same participant changed the deferral rate a year later, it would appear a correction would fall under the second correction method for elective deferrals.
This relief is available immediately and is additionally available for corrections of failures that occurred prior to April 2, 2015. There is currently a sunset provision of December 31, 2020 built into the revenue procedure, although that period can be extended.
— Jonathan St. Clair, JD (firstname.lastname@example.org). Jonathan is a Retirement Plan Consultant at SageView Advisory Group.