The Internal Revenue Service (IRS) issued two rounds of guidance modifying the Employee Plans Compliance Resolution System (EPCRS). The IRS guidance gives employers greater flexibility in correcting relatively common operational errors such as benefit plan overpayments, missed deferrals, and automatic enrollment failures. Revenue Procedure 2015-27 addresses overpayments, provides new compliance fees for certain plan loan and required minimum distribution failures, extends the period for distributing excess annual additions, and provides other helpful EPCRS improvements. Revenue Procedure 2015-28, issued less than one week later, provides long-awaited new guidance on automatic contribution failures, including errors attributable to automatic escalation and more lenient approaches for missed deferral errors of limited duration.
Revenue Procedure 2015-27
Recognizing there may be situations where it is impractical to recoup overpayments from participants, Revenue Procedure 2015-27 permits an assessment of the facts and circumstances before issuing “demand” letters requesting repayment (e.g., the overpayment amount, length and duration of the error period, the participant’s financial circumstances, and whether the error adversely impacted the plan or participants). The new guidance allows a corrective payment from the plan sponsor or third party, instead of the participant, and also permits a retroactive amendment that reconciles plan terms with plan operations. Keep in mind that retroactive amendments generally require a Voluntary Correction Program (VCP) submission.
Plan Loans and Required Minimum Distributions—New Compliance Fees
For plan loan failures affecting no more than 25 percent of all participants, the new guidance provides reduced fees ranging from $300 for 13 or fewer affected participants to $3,000 for over 150 affected participants. Before the IRS issued Revenue Procedure 2015-27, fees for loan errors were based on the total number of participants and ranged from $375 to $12,500 after applying a 50 percent fee reduction (available only if the error did not affect more than 25 percent of all participants). Like the prior EPCRS fee structure, the new reduced fees for plan loans are available only if the error (i) is attributable to a statutory loan failure (e.g., impermissible amount or repayment terms) and (ii) is the only error submitted to the IRS VCP.
The guidance also provides reduced fees, ranging from $500, for required minimum distribution (RMD) errors that affect 150 or fewer participants, to $1,500 for RMD errors that affect 151-300 participants, such as late payments to retired employees or to beneficiaries. Prior to this change, a reduced fee of $500 was available only if the error did not affect more than 50 participants. The new fees apply if the RMD errors are the only errors submitted to VCP.
Excess Annual Contributions
The extended period for distributing elective deferrals to participants with accounts that exceed the Internal Revenue Code section 415(c) annual additions limit ($53,000 for 2015) also is notable. Instead of the 2-1/2 months (or March 15) deadline, the guidance permits employers to distribute excess amounts within 9-1/2 months after the end of the plan’s limitation year that generally coincides with the deadline for filing Form 5500 (with an extension). To be eligible for the new extended deadline, an employer must have plan practices and procedures in place designed to prevent these failures from occurring.
Revenue Procedure 2015-27 also provides new model VCP forms, clarifies the rules for a determination letter application required as part of a VCP filing, and extends the deadline for adopting amendments required in connection with those two simultaneous filings.
Revenue Procedure 2015-28
Revenue Procedure 2015-28 provides three new safe harbor methods for missed deferrals: the much-anticipated automatic enrollment contributions guidance and two approaches with reduced corrective contributions. For errors not corrected within two years, EPCRS still requires an amount equal to the affected participant’s missed deferral opportunity (half of the participant’s missed deferral).
The new safe harbor correction method for automatic contributions greatly simplifies the process for fixing a failure to implement an automatic enrollment provision, affirmative election, or an automatic escalation feature. The IRS provides a practical yet generous grace period to avoid the requirement to make a qualified nonelective contribution (QNEC) for missed deferrals based on comments it received from practitioners and plan sponsors stressing that oftentimes plans discovered these errors during the annual audit conducted in connection with the Form 5500. Accordingly, if an employer fails to apply automatic enrollment or automatic escalation, Revenue Procedure 2015-28 does not require corrective contributions for the missed deferrals as long as the automatic contribution error does not extend past 9-1/2 months (October 15 for a calendar year plan) after the end of the year. There are specific notice (content and timing) requirements, and the rules require the employer to make timely corrective contributions for any missed matching contributions. Notwithstanding this, EPCRS permits a plan to apply a vesting schedule to the corrective matching contributions if the missed matching contributions are not safe harbor matching contributions and would have been subject to a vesting schedule if they had been made timely absent the deferral error. A December 31, 2020 sunset applies to this relief.
Missed Employee Contributions: Up to 3 Months Duration
Another new safe harbor approach available for all plans—regardless of whether the plan includes automatic enrollment—permits an employer to forego correcting missed deferrals if correct deferrals begin within three months after the error occurred. (An exception to this 3-month deadline applies if participants alert their employers about the error.) As with automatic contribution correction, specific notice requirements apply, and the employer must make corrective contributions for any missed matching contributions within the required time frame (generally, by the last day of the second year after the error occurred). This is a rolling 3-month period so that the new corrections rule applies if, for example, the error occurs on November 1 and correction takes place before February 1 of the next year. Prior to this change, EPCRS contained a narrow “brief exclusion” rule that provided a similar zero dollar missed deferral correction if the error occurred during the first three months of the year and participants had at least nine months to contribute amounts sufficient to make up for their missed deferrals.
Missed Employee Contributions: Between 3 Months and 2 Years Duration
The third safe harbor applies to missed deferral errors not corrected for more than three months but less than not two years. For these errors, Revenue Procedure 2015-28 permits an employer to make a reduced corrective contribution equal to 25 percent of the affected participant’s missed deferral instead of the traditional 50 percent correction amount. The employer must make this corrective contribution, plus any corrective contributions for missed matching contributions, within two years (or by the last day of the second year after the error occurred) unless a participant alerted the employer about the error. The same notice requirements apply.
These new correction methods are significant because they show the IRS’s willingness to create palatable strategies for plan compliance. This is especially significant in light of the impending changes to the determination letter program for individually designed plans. The zero dollar correction for automatic contribution failures, though limited, is welcomed relief considering that automatic enrollment features generally are error prone. The IRS relief, however, facilitates use of automatic enrollment by reducing the risk to plan sponsors for using this immensely popular feature.