IRS Provides Some Good News for Automatic Enrollment Plans
Plans that have, or have been contemplating, automatic enrollment features just got some good news from the Internal Revenue Service.
In Rev. Proc. 2015-28, issued April 2, the IRS provided new safe harbor correction methods for errors relating to automatic contribution features, including automatic enrollment and automatic escalation of elective deferrals in both 401(k) and 403(b) plans.
Under Rev. Proc. 2015-28, if the error is detected within 9½ months after the year of the failure, no corrective qualified non-elective contribution (QNEC) is required to an affected participant’s account for the missed deferral opportunity, as long as the person is enrolled within the 9½-month period (or earlier if the affected employee notifies the employer of the mistake).
Under the new safe harbor, plan sponsors would only have to make up the matching contributions that would have been made with respect to the deferrals that were not withheld. Notice of the failure to enroll the participant has to be given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin.
ASPPA was a primary instigator of these changes, and indeed the final safe harbor largely mirrors the recommendations submitted to the Treasury Department by ASPPA and the Council of Independent 401(k) Recordkeepers (CIkR) in 2012.
In unveiling the new guidance at an industry event April 2, Mark Irwy, Senior Advisor to the Secretary of the Treasury and Deputy Treasury Assistant Secretary (Tax Policy) for Retirement and Health Policy, acknowledged not only the interest in helping promote automatic enrollment, but how often the issue of corrections for inadvertent errors had been raised as a stumbling block in adopting the provision. “This issue came up with surprising frequency and fervor,” Iwry said.
This revenue procedure also provides an alternative safe harbor method for calculating “Earnings for Employee Elective Deferral Failures” under 401(k) and 403(b) plans. If an affected eligible employee has not affirmatively designated an investment alternative, missed earnings may be calculated based on the plan’s default investment alternative, provided that with respect to a correction made in accordance with the safe harbor procedures, any cumulative losses reflected in the earnings calculation will not result in a reduction in the required corrective contributions relating to any matching contributions.
One potential note of caution: The safe harbor sunsets Dec. 31, 2020, although the IRS said it will be continued if it leads to more use of automatic enrollment, among other considerations.
Employee Elective Deferral Failures
In addition to the automatic enrollment corrections, Rev. Proc. 2015-28 also includes provisions that “encourage the early correction of Employee Elective Deferral failures” if the period of failure exceeds three months. For purposes of Rev. Proc. 2015-28, the IRS defined this as a failure to correctly implement elective deferrals in a 401(k) or 403(b) plan, including elective deferrals pursuant to an affirmative election or pursuant to an automatic contribution feature (including an automatic escalation feature) and a failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan.
The IRS says this safe harbor correction would permit a plan sponsor to make a corrective contribution equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in sections .05(2)(b) and .05(5)(a) of Appendix A and section .02(1)(B) of Appendix B to Rev. Proc. 2013-12.
In order to use this safe harbor correction, the plan sponsor must satisfy three conditions:
- Correct deferrals begin no later than the earlier of either: (1) the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred; or (2) if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification.
- Provide notice of the failure that satisfies specified requirements to the affected eligible employee not later than 45 days after the date on which correct deferrals begin.
- Corrective contributions (including the 25% QNEC and employer contributions to make up for any missed matching contributions) are made in accordance with timing requirements under SCP for significant operational failures, and adjusted for earnings.
For additional information, see “Case of the Week: Little Known Correction Exception for Missed 401(k) Deferrals.”