Spring has arrived - time again for benefit plan cleaning, with the help of the Quarles & Brady Employee Benefits & Executive Compensation Law Practice Group. This alert is the first in the "Spring Cleaning" series. Over the next several weeks, we will provide you with various to-do items, reminders, and tips in the employee benefits and executive compensation areas.
Spring clean your company's retirement plan operations by confirming that your company's plan is operating in accordance with its terms and in compliance with Internal Revenue Service (IRS) and Department of Labor (DOL) rules. Both agencies offer compliance and correction programs to companies with retirement plan failures. Such programs reward an employer who can detect and correct retirement plan failures early.
The IRS recently released three pieces of guidance encouraging early and timely correction of plan failures under its correction program, called the Employee Plans Compliance Resolution System (EPCRS). Remember to regularly monitor your retirement plan operations and correct plan failures as early as possible in order to take advantage of more flexible and cost-efficient IRS and DOL compliance and correction rules.
We often see issues caused by a company not realizing that the written terms of its retirement plan differ from the company's intended and actual operation of that plan. We recommend that your HR, payroll, and/or accounting departments take time this spring to review the company's written retirement plan document to confirm that it is consistent with plan operations. For example, confirm that the plan's "compensation" definition is being applied correctly for purposes of employee deferrals and employer contributions, and that employees are participating in the plan in accordance with the its eligibility rules. In addition, in light of recent IRS guidance (discussed below), check the plan's automatic contribution feature, if any, to confirm that it was correctly implemented and continues to correctly administer that feature.
A company can correct most qualified retirement plan operational failures under EPCRS. Many plan sponsors prefer to self-correct plan failures under the Self-Correction Program of EPCRS (SCP) to avoid the time and expense of filing for IRS approval of the correction under the Voluntary Correction Program of EPCRS (VCP). However, in order to self-correct a "significant" plan failure, the correction must be substantially completed by the last day of the second plan year following the plan year for which the failure occurred. In addition, the plan sponsor must have established practices and procedures that are reasonably designed for compliance with the Internal Revenue Code, including procedures requiring that any excess annual additions under the retirement plan be corrected within nine and one-half months after the end of the plan's limitation year, as discussed in our alert from March 31, 2015 found here. Regular retirement plan monitoring will help you ensure that SCP is available to correct any retirement plan failures your company experiences.
The IRS recently amended EPCRS to provide lower-cost correction methods for certain employee deferral failures that are discovered and corrected early. These types of failures occur when an employee is not provided the opportunity to participate in the plan when eligible, or when the company does not correctly implement the employee's deferral election. Prior to modification by Revenue Procedure 2015-28, EPCRS provided that a company had to correct the employee deferral failures by making a contribution to the plan to compensate the employee for the missed deferral opportunity (i.e., 50 percent of the amount the participant would have deferred but for the plan failure), plus earnings and any applicable matching contribution.
Under IRS Revenue Procedure 2015-28, released on April 2, 2015, the IRS provides companies with the following three new correction safe harbors:
- Failure corrected within 3 months. A company is not required to make a corrective contribution of missed elective deferrals if correct elective deferrals begin no later than:
- the earlier of the first payroll date on or after the 3-month period that begins when the failure first occurs for the affected employee; or
- the first payroll date on or after the end of the month in which the employee notifies the company of the failure (provided other conditions in Revenue Procedure 2015-28, including a notice requirement, are met).
EPCRS continues to require a corrective contribution to make up for missed matching contributions.
- Failure corrected by first payroll after last day of second plan year following plan year in which failure began. A company is able to make a reduced corrective contribution of missed elective deferrals (equal to 25 percent of the missed deferrals) for an employee deferral failure that is not eligible under safe harbor #1 above if correct elective deferrals begin no later than the earlier of:
- the first payroll date on or after the last day of the second plan year following the plan year for which the failure occurred; or
- the first payroll date on or after the end of the month in which the employee notifies the company of the failure (provided other conditions in Revenue Procedure 2015‑28, including a notice requirement, are met).
- Failure involving automatic contribution feature corrected by first payroll that occurs 9 ½ months after end of plan year in which failure began. A company is not required to make a corrective contribution of missed elective deferrals for a failure to implement an retirement plan's automatic contribution feature for an employee or failure to implement an affirmative election of an employee under that plan if correct elective deferrals begin no later than the earlier of:
- the first payroll date on or after the end of the 9 ½ month period after the end of the plan year of the failure; or
- the first payroll date on or after the end of the month in which the employee notifies the company of the failure (other conditions in Revenue Procedure 2015‑28, including a notice requirement, must also be met).
EPCRS continues to require a corrective contribution to make up for missed matching contributions. This new safe harbor is available for errors that begin on or before December 31, 2020.
The IRS also recently reminded companies to timely complete corrections proposed in a VCP filing, as discussed in Issue 2015-4 of the IRS Employee Plans News. Companies often submit VCP filings requesting IRS approval of a proposed retirement plan correction. If your company receives an IRS "compliance statement" through VCP, it is important to confirm that all corrections (or other tasks required to resolve the failure under VCP, such as revisions to plan administrative procedures) are completed within the timeframe stated in the compliance statement (often within 150 days). As noted by the IRS, failure to take the corrective actions within the timeframe stated in the compliance statement (or to timely request an extension of the timeframe in writing) will invalidate the compliance statement, and the company would need to re-file its VCP submission including the required VCP filing fee.
Regular monitoring and timely correction can also benefit a company when the company attempts to correct a fiduciary violation under the DOL's Voluntary Fiduciary Correction Program (VFCP). VFCP provides a correction process if a company withholds retirement plan deferrals from employee pay, but does not timely remit those deferrals to the retirement plan trust under the DOL's plan asset rules. The company can correct this failure by submitting a VFCP filing and paying a sanction to the IRS using IRS Form 5330. The DOL provides an exemption from the IRS Form 5330 filing and sanction requirements only if the company corrects the failure by remitting the deferrals to the retirement plan not more than 180 calendar days from the date the amounts were received by the company (provided the company also complies with VFCP).
Many other situations benefit from timely detection and correction of retirement plan failures, if only to "stop the bleeding" with respect to earnings on a required corrective contribution to a plan. So, regularly review your plan operations and correct any operational failures as early as possible.
Links to Guidance: Revenue Procedure 2015-28 can be found here.
Issue 2015-4 of the IRS Employee Plans News can be found here.