Update to EPCRS for Correcting Missed Deferrals
One of the most common errors in 401(k) and 403(b) plan administration is when an employee elects to contribute to the plan or elects to change his contribution amount and his election is not timely implemented in the payroll system. A related error that is also common is the failure of the employer to inform an employee of his eligibility to start contributing to the plan when he meets the plan’s eligibility requirements.
Fortunately, the Internal Revenue Service (IRS) has provided relief for these errors via the Employee Plans Compliance Resolution System (“EPCRS”). The EPCRS is a system of IRS approved corrections that allow sponsors of retirement plans to resolve various types of failures and still continue to maintain the plan’s tax-favored status.
There are three components to the correction program:
- Self-correction (SCP) – insignificant errors that the employer can correct without any reporting obligations, fees or sanctions;
- Voluntary correction (VCP) – errors that may be corrected by paying a limited fee; and
- Correction on Audit (Audit CAP) – errors that are identified on audit, but may still be corrected by paying a sanction.
Missed deferrals generally may be corrected under SCP.
The most recent EPCRS was released in 2012 and prescribes that if an employer fails to implement an employee deferral election or fails to make an employee aware of his eligibility to defer, it must fund a contribution of 50% of an assumed missed deferral amount, plus any match the employee would have received had ALL of his deferrals been deposited, plus applicable earnings up to the date of correction.
The Treasury and IRS have increasingly encouraged plan sponsors to adopt automatic enrollment features to help employees save for retirement. However, employers have been reluctant to implement automatic features because of the increased risk of missing a deferral election and the high cost associated with correcting a missed deferral under the current EPCRS remedies.
After reviewing comments from the public, in early April, 2015 the IRS modified the EPCRS language to add correction options for deferral errors related to automatic contribution features and to reduce the required corrective contribution for some missed deferrals that are of a limited duration. The modifications, found in Rev. Proc. 2015-28 supplement the EPCRS, which is found in Rev. Proc. 2013-12. The modified rules do bring welcome relief for plan sponsors seeking to correct deferral errors. However, since the modifications were issued as a subsequent Rev. Proc. that must be considered in combination with the earlier EPCRS Rev. Proc., the rules have become more difficult to follow, as you have to look at both Rev. Procs. to determine the correction options. A new, updated EPCRS that combines all of the options and eliminates language that is no longer applicable (and ideally streamlines the rules into a comprehensive chart format) is greatly warranted. In addition, the new rules provide additional correction provisions that are only available to plans that use automatic enrollment, which muddies the waters when it comes to determining which correction option is appropriate. Some areas that seem unclear:
- Where do missed after-tax contributions fit into the new rules? References in EPCRS to elective deferrals refer to pre-tax deferrals. After-tax contributions are addressed separately with different correction procedures. The modified rules in Rev. Proc. 2015-28 refer to “Employee Elective Deferral Failures”, and defines that term as “a failure to correctly implement elective deferrals…” so it would seem that the new rules only apply to missed pre-tax contributions. If that is so, does the 40% QNEC prescribed by EPCRS for missed after-tax contributions still apply? EPCRS originally prescribed a lower QNEC for missed after-tax contributions (40%) than the QNEC for missed pre-tax deferrals (50%). Under the new rules which only require a 25% QNEC for missed pre-tax deferrals, if the necessary QNEC for missed after-tax contributions is still 40%, then it is now higher than the QNEC for missed pre-tax deferrals.
- What is the correction for a missed deferral in a plan that uses automatic contribution features, but the failure extends beyond the 9 ½ month period after the end of the plan year of failure but not beyond the end of the second plan year? I have assumed that the new rule of a 25% QNEC would apply (?)
- EPCRS prescribes special treatment for missed catch-up contributions which effectively required a 25% QNEC. Should missed catch-up contributions be viewed as any other missed deferral under the new rules (i.e., no QNEC necessary if correction is made within a rolling 3 months period)?
- The new safe harbor in Rev. Proc. 2015-28 for adjusting required contributions for earnings states that the calculation cannot “result in a reduction in the required corrective contributions relating to any matching contributions.” Does this stipulation to disregard negative earnings only relate to corrective match? Not to QNECs for missed deferrals?
I have compiled a chart of the various iterations that now exist for corrections of failed deferrals under the current EPCRS, incorporating the modified rules. This is a work in progress, and I would be happy for any feedback or additions/corrections to the chart.