Posted by Maria T. Hurd, CPA
In this world, nothing can be said to be certain, except death, taxes, and retirement plan operational errors. Two decades of plan audits have shown time and time again that even the most accurate plan sponsor is not immune from making one of the common errors.
For years, we have worked hand in hand with third-party administrators and plan sponsors to correct plan mistakes in accordance with Revenue Procedure 2013-12, which has now been updated by Revenue Procedure 2015-27 and Revenue Procedure 2015-28 to streamline the correction of certain retirement plan defects.
Automatic Enrollment Omissions
Until Rev. Proc. 2015-28 was issued, the correction of an omission of a participant who was supposed to be automatically enrolled required the employer to deposit a fully vested contribution equal to 50% of the missed deferrals (called a Qualified Nonelective Contribution-QNEC), 100% of the related match, plus earnings. Essentially, participants who were not automatically enrolled would get their full paycheck, plus an employer-paid deferral deposit that was essentially a windfall. Under the new rules, the employer does not have to deposit the QNEC if the deferrals begin by the earlier of:
- The first payroll on or after October 15 of the following year for calendar year plans, or the equivalent 9½ month period for fiscal year plans;
- If the participant notifies the plan sponsor of the failure, the first payroll on or after the last day of the month following the month of such notification;
and the sponsor provides a notice to the affected participants no later than 45 days after the date deferrals begin.
Rev. Proc. 2015-28 did not change the requirement to contribute the missed matching contributions for the entire time that the erroneously omitted participant was eligible plus earnings. The earnings are based on the participant account’s actual rate of return or the return of the default investment alternative if the participant has not made an investment election.
Elective Deferral Elections not Observed
If a participant makes a deferral contribution election and the employer does not process it, the employer does not need to contribute a QNEC if the deferrals begin by the earlier of:
- The first payroll on or after the three-month period that begins when the failure to withhold the first deferral occurred, or,
- If the participant notifies the plan sponsor of the failure, the first payroll on or after the last day of the month following the month of such notice.
If the deferrals begin after the three-month period ends, but within two years of the end of the plan year in which the operational failure occurred, the employer must deposit a QNEC of 25 percent of the missed deferral plus earnings.
For both the automatic enrollment failures and the deferral election failures, Rev. Proc. 2015-28 did not change the requirement to contribute the missed matching contributions for the entire time that the erroneously omitted participant was eligible plus earnings. The earnings are based on the participant account’s actual rate of return or the return of the default investment alternative if the participant has not made an investment election.
Distributions to Ineligible Participants and Other Overpayments
Until Rev. Proc. 2015-27 was issued, the correction of an overpayment to a plan participant required that the employer attempt to recover the excess payment from the participant. In most cases, recovering the funds from a participant is impossible or impractical, not to mention uncomfortable and potentially embarrassing to the employer who authorized the distribution. Such an employer would rather restore the funds to the plan than insist on restitution from the participant. In the case of defined contribution plans, the employer’s restoration of an erroneously distributed unvested amount to the forfeiture account only results in a timing difference, since the forfeitures would have eventually offset employer contributions.
Excess Annual Additions to Participant Accounts
Corrections for Excess Annual Additions can be made up until 9½ months after the year end, rather than 2½ months. This new deadline coincides with the extended due date for Form 5500.
Reduced Fee to Correct Participant Loans and Required Minimum Distributions
Unfortunately, plan loan failures are not eligible for self-correction and until now, a large plan sponsor had to pay an onerous fee based on the number of plan participants, not the number of loan failures. The new Rev. Proc. 2015-27 reduced the compliance fee to $300 to correct 13 or fewer failures, and up to $3,000 for 150 or more failures, which will encourage VCP filings by large plan sponsors who have been reluctant to pay $15,000-$25,000 to correct a handful of loan failures.
With the same goal of facilitating compliance with reduced fees, Rev. Proc. 2015-27 increases the number of Required Minimum Distribution (RMD) failures that can be corrected for a $500 compliance fee for 50 to 150 failures, and $1,500 to correct 151 to 300 failures.
Enhanced Correction Options
As Rob Choy said at the ASPPA Benefits Council Chicago Regional Conference, the IRS has opted to add guidance to the existing EPCRS Revenue Procedures instead of reissuing replacement Revenue Procedures, in an effort to provide better opportunities and incentives for plan sponsors to get compliant. Revenue Procedures 2015-27 and 2015-28 are proof of their commitment to efficiently provide mechanisms that facilitate the correction of common errors and incentivize plan sponsors to offer retirement savings programs for their employees without fear of the mistakes they might make. Death and taxes are inevitable and final, but the third certainty, plan operational errors, is the least scary of the three as a result of the enhanced EPCRS program provisions.
If you have questions or seek additional information on this subject, please contact our Employee Benefit Plan Team.
Maria T. Hurd, CPA
Retirement Plan Audit Services
Chris J. Ciminera, CPA, QKA
Manager – Accounting & Auditing