Tuesday, June 2, 2015

IRS Gives Plan Sponsors Welcome Relief for Automatic Enrollment Features

The Internal Revenue Service (IRS) recently announced modified correction methods for errors relating to automatic contribution features, including automatic enrollment, automatic escalation, and employee elective deferrals in both 401(k) and 403(b) plans.

The correction methods in the new Revenue Procedure 2015-28 are in addition to those previously identified in Revenue Procedure 2013-12. These new correction methods will encourage employers to more readily include automatic enrollment features in their defined contribution plans.
BACKGROUND: ELECTIVE DEFERRAL FAILURES
Defined contribution plans with automatic enrollment or automatic escalation must take deductions from employees as soon as possible after enrollment. An “elective deferral failure” occurs if an employer fails to implement deductions properly or in a timely manner because:
  • the eligible employee was not automatically enrolled;
  • the employee’s deferral election was not properly implemented;
  • the deferral percentage was not automatically increased; or
  • the employee was mistakenly excluded from the plan.
Under current safe harbor rules, these deferral failures can be costly for an employer. If employee deductions were missed, the employer would need to make a qualified non-elective contribution (QNEC) to the employee’s account. This would be equal to 50% of the missed deduction amount, plus any related employer match, plus investment earnings.

ENCOURAGING NEWS FROM IRS
Recognizing that the potential cost of QNEC discourages employers from adopting automatic enrollment and/or automatic escalation features, IRS issued Revenue Procedure 2015-28 to modify the safe harbor correction methods for deferral failures within a 401(k) or 403(b) plan. This new corrective action not only encourages employers to adopt and/or to retain automatic enrollment features, but also encourages the early correction of missed deferrals, should they occur.

New Correction Methods for Elective Deferral Failures: Automatic Enrollment Plans
QNEC is waived for auto-enrollment or auto-escalation deferral failures as long as the employer follows these steps:
  1. The missed deferral must be corrected by the earlier of: 
    • 9½ months after the end of the plan year in which the failure occurred; or 
    • if the employee notified the employer of the error, the first pay period in the second month following the employer being notified. 
  2. A notice of the failure is given to the employee within 45 days of the corrected deferrals. 
  3. Any related employer match, plus investment earnings, is given to the employee. 
New Correction Methods for Elective Deferral Failures: Other than Automatic Enrollment Plans
QNEC is waived for employee elective deferral failures identified within three months, as long as the employer follows these steps:
  1. The missed deferral must be corrected by the earlier of: 
    • the first pay period following the missed deferrals; or 
    • if the employee notified the employer of the error, the first pay period in the second month following the employer being notified. 
  2. A notice of the failure is given to the employee within 45 days of the corrected deferrals. 
  3. Any related employer match, plus investment earnings, is given to the employee. 
Modified Correction Method
If the deferrals cannot be corrected in the timeframes outlined above, a modified correction method may be used. Under this scenario, a QNEC equal to 25% of the missed deferrals (plus earnings) can be made if corrections are made by the earlier of:
  • the first pay period following the end of the second year following the plan year of the missed deferrals; or 
  • if the employee notified the employer of the error, the first pay period in the second month following the employer being notified.
A notice of the failure must also be given to the employee within 45 days of the corrected deferrals.

If the modified correction method cannot be used (i.e., the deferrals were not corrected within the timeframes outlined) then the correction methods outlined in Revenue Procedure 2013-12 must be used (a QNEC of 50% of the missed deferrals, any employer matching contributions, plus earnings).

CONCLUSION
These new and modified rules for missed deferrals provide welcome relief for sponsors of 401(k) and 403(b) plans. Plan sponsors who may have been discouraged from implementing automatic enrollment features in their plans may now feel more comfortable adopting these methods as a way to help employees save for their retirement.

To learn more about how plan sponsors can improve participation rates and overall savings rates within their retirement plans, read Automatic Features in Defined Contribution Plans. If you have questions about this article, or would like to speak with a dedicated retirement plan advisor, please call (855) 882-9177 or email us at sbs@hanys.org.