Reflecting comments it requested, and others it received, the Internal Revenue Service (IRS) recently issued two updates which modify the Employee Plans Compliance Resolution System (EPCRS), which is the comprehensive system for correction of retirement plan failures. Significantly, the updates encourage employers to add automatic contribution features to their plans, providing for default contributions by participants. Plans with automatic contribution features can use a new safe harbor to correct certain deferral failures, thereby reducing corrective contributions required of employers. The updates also encourage early correction of deferral failures by making available two safe harbors which feature reduced corrective contributions by employers.

In addition, the updates make a number of miscellaneous changes to EPCRS, addressing topics such as plan overpayments, excess annual additions, filing fees and correction procedures.

New Alternative Safe Harbor Correction Methods for Elective Deferral Failures

Under Revenue Procedure 2015-28, alternative safe harbor correction methods are available for these “elective deferral failures” under a 401(k) plan or a 403(b) plan:

  • A failure to correctly implement elective deferrals pursuant to an employee’s affirmative election or pursuant to a plan’s automatic contribution feature (including an automatic escalation feature)
  • A failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan

One correction method applies to plans with automatic contribution features and two other correction methods are available to all plans with elective deferrals.

1. Safe Harbor to Correct Elective Deferral Failures Under a Plan with an Automatic Contribution Feature

This safe harbor is available if a plan with an automatic contribution feature either failed to implement automatic deferrals or failed to implement an employee’s election in lieu of automatic deferrals—provided that the failure does not continue beyond nine-and-one-half months after the year of failure. If the following conditions are satisfied, the failure may be corrected without a qualified nonelective contribution (QNEC) from the employer: 

  1. Correct deferrals for an employee begin by the earlier of the first payment of compensation on or after (i) nine-and-one-half months after the end of the plan year in which the failure first occurred, or (ii) the last day of the month after the month of notice, if the employer was notified of the failure by an employee;
  2. An affected employee receives a prescribed form of notice (described below) no later than 45 days after the correct deferrals begin; and
  3. The employer makes corrective plan contributions, increased for earnings, for any missed matching contributions because of the deferral failure.

A safe harbor allows earnings to be calculated based on the plan’s default investment alternative, if the employee did not make an investment election. An employer’s corrective contributions must be made by the last day of the second plan year following the plan year for which the failure occurred.

This safe harbor correction method is available for failures that begin on or before December 31, 2020.

2. Safe Harbor for Correction of Elective Deferral Failures of Three Months or Less

If an elective deferral failure is corrected within three months, the employer is not required to make a qualified nonelective contribution (QNEC) if the following conditions are satisfied: 

  1. Correct deferrals for an employee begin by the earlier of the first payment of compensation on or after (i) the three-month period that begins when the failure first occurred, or (ii) the last day of the month after the month of notice, if the plan sponsor was notified of the failure by an employee;
  2. An affected employee receives a prescribed form of notice (described below) no later than 45 days after the correct deferrals begin; and
  3. The employer makes corrective plan contributions, adjusted for earnings, for any missed matching contributions because of the deferral failure.

A safe harbor allows earnings to be calculated based on the plan’s default investment alternative, if the employee did not make an investment election. An employer’s corrective contributions must be made no later than the last day of the second plan year following the plan year for which the failure occurred.

3. Safe Harbor for Correction of Elective Deferral Failures that Extend Beyond Three Months but Not Beyond the Self-Correction Period for Significant Failures

A plan may use this safe harbor if an elective deferral failure lasts longer than three months but is corrected by the last day of the second plan year following the plan year for which the failure occurred, provided that the following conditions are satisfied: 

  1. Correct deferrals for an employee begin by the earlier of the first payment of compensation made on or after (i) the last day of the second plan year following the plan year in which the failure occurred, or (ii) the last day of the month after the month of notice, if the employer was notified of the failure by an employee;
  2. An affected employee receives a prescribed form of notice (described below) no later than 45 days after the correct deferrals begin; and
  3. The employer makes corrective contributions, including a QNEC equal to 25 percent of the missed deferrals along with any missed matching contributions because of the deferral failure, and those contributions are adjusted for earnings.

A safe harbor allows earnings to be calculated based on the plan’s default investment alternative if the employee did not make an investment election. An employer’s corrective contributions must be made no later than the last day of the second plan year following the plan year for which the failure occurred.

Required Notice to Affected Employees

Each safe harbor correction method described above requires that affected employees receive a timely notice with the following information:

  • General information relating to the failure, such as the percentage that should have been deferred and when deferrals should have begun
  • A statement that appropriate amounts have begun (or will begin) to be deducted from compensation and contributed to the plan
  • A statement that corrective contributions relating to missed matching contributions have been made (or will be made)
  • An explanation that an affected participant may increase his or her deferral percentage in order to make up for missed deferrals, subject to applicable limits under Section 402(g) of the Internal Revenue Code
  • The name of the plan and plan contact information

Other Modifications to EPCRS

Revenue Procedure 2015-27 makes a number of miscellaneous changes to EPCRS, including the following:

Overpayments to Participants. Employers are to take reasonable steps to have overpayments returned to the plan, but overpayments are not required to be returned to the plan in all cases. Instead, there is flexibility in correcting overpayments to participants, depending on the facts and circumstances. For example, some participants may have financial difficulty if they are required to return overpayments made over many years. Instead of seeking recoupment from participants in all cases, the plan sponsor or another entity may contribute the amount of the overpayment to the plan, along with appropriate interest.

Excess Annual Additions. Repeated correction of excess annual additions (under Section 415 of the Internal Revenue Code) does not prevent a plan from using the self-correction program under EPCRS, as long as excess annual additions are regularly returned to employees within nine-and-one-half months after the end of the plan’s limitation year.

Extended Period for Adopting Corrective Amendments. The period for adopting a corrective plan amendment is extended if a determination letter application must be filed together with a voluntary correction program (VCP) submission. The amendment must be adopted by the later of 150 days after the date of the compliance statement or 91 days after issuance of a favorable determination letter.

VCP Filing Fee for Required Minimum-Distribution Defects. The filing fee is reduced for a VCP submission to correct required minimum distributions. The filing fee for a VCP submission involving a failure to satisfy the minimum-distribution requirements is $500 if 150 or fewer participants are affected and $1,500 if 151 to 300 participants are affected. The general EPCRS filing fees apply if the number of affected participants exceeds 300.

VCP Filing Fee for Participant Loan Defects. The filing fee is reduced for a VCP submission involving participant loan failures. The filing fee ranges from $300 for failures involving 13 or fewer participants to $3,000 for loan failures involving 150 or more participants.