IRS Highlights New Methods for Correcting Elective Deferral Errors

The IRS has put in place new ways to correct elective deferral errors in 403(b) and 401(k) plans. The IRS on May 6 updated its webpage concerning these corrections; it also included coverage of these changes in Issue 2015-5 of Employee Plans News.

These methods are contained in Revenue Procedure (Rev. Proc.) 2015-28, which the IRS issued on April 2. ASPPA was a primary instigator of these changes, and the final safe harbor largely mirrors the recommendations ASPPA and the Council of Independent 401(k) Recordkeepers (CIkR) submitted to the Treasury Department in 2012.

Under the new methods, plan sponsors can avoid or pay corrective contributions for the following elective deferral errors:

• incorrect automatic contributions or automatic escalation of elective deferrals;

• failure to correctly determine or withhold elective deferrals; and

• exclusion of eligible employees.

Auto Contribution and Escalation Errors

Sponsors of 401(k) and 403(k) plans with automatic contribution and escalation features generally don’t need to make corrective contributions for missed or incorrectly calculated employee elective deferrals if correct deferrals begin by the first payment of compensation made on or after the earlier of:

• 9½ months after the end of the plan year in which the failure first occurred; or

• the last day of the month after the month the affected employee first notified the plan sponsor of the error.

The plan sponsor must issue a written notice to affected employees (and provide corrective matching contributions, if applicable). This safe harbor is not available for failures occurring after 2020, but the IRS will consider whether to extend it.

Early Correction of Elective Deferral Errors

To encourage early correction of employee elective deferral failures, all 403(b) and 401(k) plan sponsors pay less for early correction of employee deferral errors.

No corrective contributions are required for missed employee elective deferrals if correct deferrals begin by the first payment of compensation made on or after the earlier of:

• three months after the failure first began for the affected employee; or

• the last day of the month after the month the affected eligible employee first notified the plan sponsor.

A 25% corrective contribution is required for missed employee elective deferral failures if the period of failure exceeds three months but correct deferrals begin by the first payment of compensation made on or after the earlier of:

• the last day of the second plan year after the plan year in which the failure first began for the affected employee; or

• the last day of the month after the month the affected eligible employee first notified the plan sponsor.

The plan sponsor must issue a written notice to affected employees (and provide corrective matching contributions, if applicable).

Notice, Matching Contributions and Missed Earnings

To use the new safe harbor corrections for employee elective deferral failures, the plan sponsor must:

1. provide written notice to the affected employee no later than 45 days after the date correct deferrals begin; and
2. if applicable, make corrective contributions to make up for missed matching contributions, plus earnings on all missed contributions and deferrals, within the two-year timeframe used to correct significant operational failures under Rev. Proc. 2013-12.

If these requirements are not met, the plan sponsor may use the other safe harbor correction methods under Rev. Proc. 2013-12.

Calculating Earnings

For plans with automatic contribution arrangements, earnings may be calculated using the plan’s default investment alternative if the participant hasn’t chosen an investment alternative. Remember that:

• Cumulative losses don’t reduce the corrective contributions.

• Plan sponsors can’t use this method unless they meet the conditions Rev. Proc. 2015-28 specifies.

For plans with no automatic contribution feature or that haven’t met the applicable conditions, earnings are determined according to Rev. Proc. 2013-12.

Content of Written Notice Issued to Affected Employees

Rev. Proc. 2015-28 says that there is no need to list the following in the written notice:

• specific dollar amounts of missed deferrals; and

• dollar amounts of corrective contributions.