Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Reduced Corrective Contributions

During April 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-28 that made amendments to the safe harbor corrective contributions for employee benefit plans. The Employee Plans Compliance Resolution System (EPCRS) allows plan sponsors to correct certain failures and thereby, continue to provide employees with retirement benefits. The IRS received numerous comments requesting special correction methods for plans with automatic contribution failures. These comments have surrounded the fact that employers were discouraged from adopting automatic contribution features due to potential implementation issues and the fees and corrective contributions associated.

This new Revenue Procedure makes modifications for the following:

  • Auto Contribution and Escalation Errors – New safe harbor EPCRS correction methods including automatic enrollment and automatic escalation of elective deferrals in plans described in § 401(k) and § 403(b)

o   No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of

  • 9.5 months after the end of the plan year in which the failure first occurred
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

o   This safe harbor correction method is currently set to expire in 2020, but the IRS will reconsider an extension

  • Elective Deferral Errors – Special safe harbor correction methods for plans (including those with automatic contribution features) that have failures that are of limited duration and involve elective deferrals

o   No corrective contributions are required if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:

  • 3 months after the failure first began
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

o   25% corrective contributions are required if the period of failure exceeds three months and if the Plan Sponsor corrects deferrals by the first payment of compensation/wages on or after the earlier of:

  • The last day of the second plan year after the plan year in which the failure first began.
  • The last day of the month after the month the affected employee first notified the Plan Sponsor

Overall, if a Plan Sponsor wants to implement the new guidance he or she must:

  • Give written notice to employees affected by the error no later than 45 days after the correct deferrals begin
  • Make corrective contributions to make up for missed matching contributions plus earnings on all missed contributions and deferrals, within the two-year timeframe used to correct significant operational failures under Revenue Procedure 2013-12

For further information see the Internal Revenue Bulletin here.

By Kevin Bach, CPA, CVA