In response to comments from the employee benefits community, the IRS has issued two updates in quick succession for the Employee Plans Compliance Resolution System (EPCRS). The new procedures – Rev. Proc. 2015-27 and Rev. Proc. 2015-28 – do not replace, but provide modifications and clarifications to Rev. Proc. 2013-12.

Rev. Proc. 2015-27

Issued on March 27, 2015, Rev. Proc. 2015-27 clarifies the methods that may be used to correct overpayment failures and makes changes to various provisions of Rev. Proc. 2013-12. For overpayment failure corrections, plan sponsors are no longer required to only recoup large overpayments from plan participants and beneficiaries, but may explore alternative methods of correction. A brief summary of the Rev. Proc. 2015-27 modifications is available here. The modifications are effective July 1, 2015, but plan sponsors may apply these provisions beginning on March 27, 2015.

The IRS will accept comments from the public until July 20, 2015.

Rev. Proc. 2015-28

Rev. Proc. 2015-28, issued on and effective April 2, 2015, modifies EPCRS by adding safe harbor correction methods for employee elective deferral failures in both 401(k) and 403(b) plans. A plan sponsor who discovers a failure quickly is either relieved of making a QNEC to restore missed elective deferrals or is required to make a lesser QNEC.

Rev. Proc. 2015-28 adds a new definition of “employee elective deferral failure” to EPCRS Appendix A, which includes

  1. Affirmative elections, including the failure to inform of employees of eligibility and the failure to implement an affirmative election,
  2. Auto enrollment (including an affirmative election intended to override an automatic enrollment), and
  3. Auto escalation.

The new safe harbor correction methods do not apply to failures involving after-tax contributions.

Safe Harbor Correction Method for Automatic Enrollment Failures

If the failure is discovered by the extended due date for filing Form 5500 for the plan year of the failure, i.e., 9½ months after the close of the plan year or October 15 for calendar year plans, a QNEC to make up for the missed deferral opportunity is not required if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the 9½ month period; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must include the information specified in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. Earnings can be based on the plan’s default investment if the affected participant had not made an investment election. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

This correction method will not be available for plan failures that occur after December 31, 2020.

Safe Harbor Correction Methods to encourage Early Correction

Rev. Proc. 2015-28 also includes safe harbor correction methods to encourage the early correction of employee elective deferral failures depending on the length of the failure.

If the failure is discovered within 3 months, a QNEC to make up the missed deferrals is not required if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the three- month period; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification.
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must satisfy the requirements in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

If the failure is discovered after 3 months, but before end of the second plan year after the plan year of the failure (the period for self-correcting a significant failure), the plan sponsor must make a QNEC equal to 25% of the missed elective deferral opportunity (instead of 50%) if:

  • Timing. Correct deferrals begin no later than the first paycheck on or after the last day of the second plan year following the plan year in which the failure occurred; or if the plan sponsor had notice of the failure, on or after the last day of the month after the month of the notification.
  • Notice. Notice of the failure is given to the affected employees within 45 days after the correct deferrals begin. The notice must satisfy the requirements in the modified Appendix A of Rev. Proc. 2013-12.
  • Corrective Matching Contributions. Corrective matching contributions, adjusted for earnings, are made for the entire period of the failure based on missed deferrals that would have been made according to the terms of the plan. The contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

The notice required for all 3 new safe harbors must include general information about the failure, a statement that the correct employee deferrals have commenced or will commence soon, an explanation that the affected employees can increase their deferral percentages to make up the missed deferrals, subject to the § 402(g) limit, and the name of plan and contact person.

The new safe harbor correction methods provided by Rev. Proc. 2015-28 allow plan sponsors to reduce the costs associated with correcting such failures.