Posted by Maria T. Hurd, CPA
One of the most common operational errors when administering retirement plans is the failure to implement a participant’s elective deferral election or change in percentage. Implementing elective deferrals timely often requires more than one person or entity to effectuate a change in the payroll system coding. As stated in our previous blog Death, Taxes, and Plan Errors, there are many ways in which plan processes can inadvertently go astray. In the case of missed deferral elections, the Employee Plan Compliance Resolution System (EPCRS) offers two options for employers completing a correction. The first option is the one that has been available under Revenue Procedure 2013-12. Revenue Procedure 2013-12 was updated, but not replaced by Revenue Procedures 2015-27 and Revenue Procedures 2015-28, which offer a less expensive way to correct missed deferral errors, but require that a notice be distributed to affected participants.
The first option requires the employer to contribute a Qualified Non-Elective Contribution (QNEC) to the participant’s account in the amount of 50% of the missed deferral plus 100% of the match that would have been allocated for the full deferral, plus lost earnings. No notice to the participant is required under this method.
Under the second option, the employer does not need to contribute a QNEC if 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
However, if the deferral deposits begin after the three-month grace 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% of the missed deferral, 100% of the match for the entire deferral that should have been withheld, plus earnings.
In order to use this correction method, the plan sponsor must provide a notice of the failure to the affected participants no later than 45 days after the date the correct deferrals begin.
The notice requirements must contain:
- General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred
- A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan.
- A statement that corrective contributions have been made (or will be made).
- An explanation that the affected participant may increase his or her deferral percentage in order to make up for the missed deferral opportunity, subject to applicable limits under section 402(g).
- The name of the plan and plan contact information (including name, street address, e-mail address, and telephone number of a plan contact).
In most cases, the dollars involved in the correction of missed deferral deposits are not substantial, and employers choose the 50% or the 25% correction options based on their management style and whether they favor administrative simplicity or full transparency. Both methods are approved by the IRS through EPCRS. Auditors, third party administrators, ERISA counsel, and investment advisors are generally all willing and able to collaboratively assist employers who inadvertently omit a deferral election change.