This article originally ran on May 21, 2015.
By Michael Webb
In the April 9th Market Beat, I wrote about the 403(b)/457(b) impacts of Revenue Procedure 2015-27, which made several updates to the Employee Plans Compliance Resolution System (EPCRS) found in Revenue Procedure 2013-12. EPCRS is the formal guidance that the IRS provides regarding correction of plan defects, and it is updated from time to time.
However, apparently the IRS was not done — on April 2, it released Revenue Procedure 2015-28
, outlining even more changes to EPCRS, this time in the area of automatic contribution arrangements, more commonly referred to as autoenrollment and autoescalation. Perhaps the IRS wanted to highlight these particular autoenrollment changes, or perhaps it simply forgot to include these changes in the previous revenue procedure!
Regardless of the reason, we received two EPCRS revenue procedures in a week; since I have already opined on the former, I will know share my thoughts on the latter. The purpose of this article is to examine the autoenrollment changes to EPCRS to determine their specific impact on 403(b)/457(b) plan sponsors.
As indicated in a recent Market Beat article by Ellie Lowder
, for a variety of compliance reasons autoenrollment features are relatively rare in the non-ERISA 403(b) marketplace, and are only marginally more commonplace among ERISA 403(b) plans. In addition, autoenrollment is limited in 457(b) plans, since only governmental plans may permit automatic enrollment (private tax-exempt plans may not
utilize this feature; even if they could, such plans may not correct defects under EPCRS at any rate).
Thus, any regulatory changes to autoenrollment will have a limited impact on 403(b) and 457(b) plans. Having said that, autoenrollment is on the rise in such plans, so the changes to EPCRS may have a greater impact in the future.
The current EPCRS program corrects failures to autoenroll employees by providing an employer contribution that is equivalent to 50% of the amount of the missed deferral. If you are an employee who wishes to sign up for such a “deal” I certainly cannot blame you; not only would you receive your full salary (without the automatic deferral taken out), but an additional employer contribution to boot! However, for plan sponsors, I believe you can see why it is not a desirable situation. Needless to say, this has not been one of the more popular provisions of EPCRS, and the IRS has received several comments requesting change.
Under this new revenue procedure, a limited safe harbor (unusually, effective only though 2020, though it may be extended) will permit employers the option of not making an additional employer contribution at all if:
- The defect is discovered within 9½ months in the year following the plan year of the failure (not coincidentally, this is the extended 5500 filing deadline for ERISA plans, since most failures in such plans are discovered during the required audit for the 5500).
- Corrected automatic deferrals commence no later than the earlier of the first paydate on or after the 9½-month period specified above or the first paydate of the month following the month in which the employee notifies the employer. Since it is rare that an employee actually notifies the employer, the 9½-month window will apply in most cases.
- Applicable notice is provided to the employee within 45 days after the commencement of the correct deferrals.
- Missed matching contributions (and earnings) are contributions are made as if the error had not occurred, in accordance with the timing requirements under the self-correction program for significant operational failures, with one exception. Regarding calculation of earnings, which can often be difficult in the absence of an investment election by the employee (which is often the case), the default investment alternative return can be used provided that — if the return results in a loss — zero earnings are calculated rather than a reduction in the amount of the missed contribution for loss.
In addition, in an attempt to further relieve the administrative burden of correcting missed automatic deferrals, as well as missed deferrals that were actually elected by the employee (e.g., in a non-autoenrollment situation) some additional safe harbor corrective procedures were added, as follows:
- If the missed deferrals do not occur for more than three months, no corrective employer contribution is required at all, provided that items 3 and 4 above are also implemented, and that the employee did not notify the employer during months 1-2 of the 3-month period (a rare occurrence) in which case the correct deferrals must commence no later than the first paydate of the month following the month of notification.
- If the missed deferrals occur for more than three months, but less than the self-correction period of significant operational failures (generally, within two plan years following the year in which the failure occurred), an employer contribution is required, though instead of 50% of the missed deferral amount under the existing EPCRS, the amount is 25%. Again, items 3 and 4 above must also be implemented, and the defect must be corrected earlier in the unlikely event that the employee notifies the employer earlier.
The elimination/reduction of an employer contribution to correct most autoenrollment failures, as well as certain elective deferral failures, is welcome news for all retirement plan sponsors.
However, the changes will have a limited impact on the 403(b)/governmental 457(b) market, since autoenrollment is not yet a popular feature among such plan sponsors. Of greater importance to such plan sponsors is the relaxation of the corrective procedures for missed elective deferrals in situations that do not involve autoenrollment.
Practice Pointer: It is expected that automatic enrollment is a trend that will expand to the tax-exempt and governmental plan marketplace in the coming decade. Thus, the forward-thinking advisor may wish to become a scholar of autoenrollment provisions.
Michael Webb chairs the NTSA Communications Committee and is Vice President at Cammack Retirement.
Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.
Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.