Recent Guidance for Retirement Plan Sponsors: Revenue Procedure 2015-28 and the EPCRS

The Employee Plans Compliance Resolution System (EPCRS) sets forth a complex and comprehensive set of guidelines for retirement plan sponsors to follow when correcting some of the more common operational and document failures that occur when administering a plan.  The underlying philosophy of the EPCRS program is to ensure that the corrective action results in returning the participant’s account to the same position it would have been had the failure not occurred.  Among the various issues included in the EPCRS program are guidelines for the correction of a missed deferral opportunity, which typically results from a failure to implement an employee’s contribution election, or not providing an eligible employee with the appropriate material in a timely manner.

Under the original guidance, correction for a missed deferral opportunity would require a plan sponsor to make a qualified nonelective contribution (QNEC) to the plan on behalf of an affected participant to compensate the participant for their missed deferral opportunity.  In general, this QNEC was equal to the sum of 50% of the amount the participant would have deferred from pay had the elective deferrals been properly implemented, plus 100% of the matching contributions (if any) the participant would have received, plus earnings.  Some have viewed this approach as providing a participant with a windfall in that they are receiving a contribution of elective deferral without actually having to reduce their salary, albeit only half of the amount an employee would have otherwise contributed.

With Revenue Procedure 2015-28, the IRS has taken steps to further limit the corrective obligation.  Under 2015-28, the IRS has provided new and revised safe harbor correction methods for elective deferral failures that occur both under plan’s that utilize automatic enrollment and traditional enrollment provisions.

If a plan administrator fails to implement automatic contributions, or fails to implement an affirmative election to contribute more than the automatic contribution rate, no correction is necessary if the following conditions are met:

  1. The failure does not extend beyond 9½ months after the end of the plan year in which the failure first occurred.
  2. Elective deferrals at the correct rate begin no later than the first payroll date following the period described above, or, if earlier, the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant.
  3. The plan administrator sends a notice to affected participants within 45 days after the correction. 
  4. A QNEC for missed matching contributions, plus earnings, is made no later than the end of the second plan year following the year in which the failure first occurred. 

The new guidance also provides for two additional safe harbor correction methods for elective deferral failures that are unrelated to automatic contributions. 

If the elective deferral failure persists for three or fewer months, no correction is necessary provided the plan administrator timely corrects the failure and meets notice requirements similar to that described above.  A QNEC for missed matching contributions, plus earnings, is still required. 

Where the elective deferral failure extends beyond three months, but not beyond the end of the second plan year following the plan year in which the error occurred, the failure may be corrected by making a QNEC equal to 25% of the missed deferral plus any missed matching contributions and earnings.  This correction method is available if the correction is timely implemented and the plan administrator meets the notice requirements described above.

If you have questions regarding this recent guidance, please reach out to your Schneider Downs representative and visit the Schneider Downs Our Thoughts On blog for similar ERISA articles.

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SECURE 2.0 Act –Section 317. Retroactive First-year Elective Deferrals for Sole Proprietors
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