The Internal Revenue Service (IRS) recently issued two revenue procedures that modify the Employee Plans Compliance Resolution System (EPCRS). EPCRS sets forth the various correction programs and correction methodologies for qualified retirement plans, 401(k) plans, 403(b) plans, SEP IRAs, and Simple IRAs.
Modifications to Missed Deferral Contributions
EPCRS provides that a plan sponsor must make a qualified nonelective contribution (QNEC) when the plan sponsor does not implement an employee’s elective deferral election. The QNEC is equal to 50 percent of the employee’s missed deferral. The recent modifications to EPCRS eliminate or reduce the missed deferral QNEC the plan sponsor contributes to the plan.
Safe Harbor Correction for Failure to Implement Automatic Enrollment
The IRS modified EPCRS to provide a safe harbor correction method for the failure to implement an automatic enrollment feature or the failure to implement an affirmative election of an employee who is otherwise subject to an automatic contribution feature. If certain conditions are satisfied, the plan sponsor is not required to make a QNEC for the missed deferral. These conditions generally include:
- The failure does not extend beyond the end of 9 ½ months after the end of the plan year of the failure, which is generally the deadline for filing Form 5500 including extensions;
- Correct deferrals begin by the earlier of (a) the first pay period on or after the 9 ½ months following the plan year in which the failure occurred, or (b) the first pay period on or after the end of the month following the month the plan sponsor is notified by the employee of failure;
- The plan administrator sends a notice to the affected employee no later than 45 days after correct deferrals begin. The notice must include general information relating to the failure, such as the percentage of compensation that should have been deferred and the approximate date on which deferrals should have begun, a statement that appropriate amounts have begun (or will begin shortly) to be deducted and contributed to the plan, a statement that corrective contributions relating to any missed matching contributions have been (or will be) made, an explanation that the affected participant may increase his or her deferral percentage to make up for the missed deferrals and plan contact information; and
- A corrective contribution for matching contributions is made, if required, no later than the end of the second plan year following the year in which the failure first occurred.
The correction method also provides an alternative safe harbor for calculating earnings. If an affected employee has not affirmatively designated an investment alternative, missed earnings may be calculated based on the plan’s default investment alternative. However, any cumulative losses reflected in the earnings calculation will not result in a reduction of the required corrective matching contribution.
This safe harbor correction method is available for failures that begin on or before December 31, 2020, but IRS may extend the correction method.
Changes to Safe Harbor Correction for Failures to Implement Employee Deferral Election
The IRS also modified EPCRS to provide two safe harbor correction methods for the failure to implement an employee’s elective deferral election. When the failure does not exceed three months, the plan sponsor is not required to make a QNEC for the missed deferral provided that:
- Correct deferrals begin no later than the earlier of (a) the first pay period on or after the three-month period that begins when the failure first occurred or (b) the first pay period on or after the end of the month following the month the plan sponsor is notified by the employee of failure;
- The notice requirement described above is met; and
- A corrective contribution for matching contributions, adjusted for earnings, is made, if required, no later than the end of the second plan year following the year in which the failure first occurred.
If the deferral failure extends beyond three months, but not beyond the last day of the second plan year following the year in which the error occurred (or if the conditions for the other safe harbor correction method described above are not met), a reduced QNEC may be available. A plan sponsor may make a QNEC of 25 percent of the missed deferral (rather than 50 percent) if the following conditions are satisfied:
- Correct deferrals begin by the earlier of (a) the first pay period after last day of the second plan year following the plan year in which the failure occurred, or (b) the first pay period after the end of the month following the month the plan sponsor is notified by the employee of the failure;
- Notice is given to the employee no later than 45 days after correct deferrals begin; and
- Corrective contributions (including any missed matching contributions and earnings) are made in accordance with the timing rules under EPCRS.
Correction for Overpayment Errors
The IRS modified EPCRS to clarify the methods available to correct an overpayment error. Overpayments generally occur when a participant receives a distribution from the plan that exceeds the amount that should have been paid to such participant. Prior to the new guidance, correction of an overpayment required the plan sponsor to take reasonable steps to have the overpayment returned to the plan. If the overpayment is not repaid to the plan, the employer or another person must contribute the difference to the plan.
Responding to complaints that some plans have demanded the return of large amounts from participants on account of plan administration errors that occurred over an extended period of time, the new guidance provides that plan sponsors have flexibility in correcting an overpayment. For example, rather than seeking repayment from participants, the plan sponsor can contribute the amount of the overpayment. In addition, the plan sponsor may adopt a retroactive amendment to conform the plan document to the plan’s operations. Any correction method used must be consistent with the general principles of EPCRS.
Self-Correction of Excess Annual Additions
Generally, to be eligible for the self-correction procedure, a plan must have established practices and procedures to prevent recurrence of the failure. The IRS revised the self-correction eligibility so that repeated corrections of excess annual additions under Code Section 415(c) will not result in a lack of established practices and procedures as long as any excess annual additions for a year are corrected through the return of elective deferrals to affected participants within 9 ½ months after the end of the plan’s limitation year.
Reduced Fees for Certain Correction Procedures Under VCP
EPCRS requires the plan sponsor to pay a compliance fee for submissions to the VCP program. The compliance fee is generally determined by the number of participants participating in the plan. EPCRS provides for reduced fees for certain correction procedures, such as when a plan sponsor is correcting for the failure to distribute required minimum distributions (RMD) and when there is a plan loan failure.
The IRS modified EPCRS to expand availability of the reduced fee for the correction of failures to distribute RMDs. Previously, the compliance fee for RMD failures was generally $500 if the failure involved 50 or fewer participants. EPCRS was modified so that the compliance fee for RMD failures is $500 if 150 or fewer participants are affected and $1,500 if 151 to 300 participants are affected. If more than 300 participants are affected, then the regular compliance fee applies.
The IRS modified EPCRS to reduce the fee for the correction of plan loan failures. Previously, the compliance fee for plan loan failures was generally 50 percent of the regular compliance fee if the failure did not affect more than 25 percent of the plan sponsor’s participants in any of the years in which the failure occurred. The new compliance fee for plan loan failures is now capped at $3,000 for failures that do not affect more than 25 percent of the plan sponsor’s participants. The schedule of the new compliance fee for plan loan failures is below.
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The compliance fee changes are effective July 1, 2015, but may be applied retroactively to March 27, 2015.