Posted by Maria T. Hurd, CPA
Distributing a Safe Harbor Match Plan Notice Slipped Through the Cracks. What is the Correction?
The barrage of changes introduced by the SECURE Act, closely followed by the CARES Act, along with furloughs, remote work, and all the work-life changes of pandemic year 2020 may have resulted in administrative errors in plan operations, such as missed notice distributions. So now what? The IRS has correction programs for that – “EPCRS”!
Making Participants Whole
The IRS correction programs are based on the premise that an employer should correct plan operation errors by putting participants in the position they would have been in had the error not been made.
What to do When “There’s No Way to Know What Might Have Been”
But how does an employer know what a participant would have done had he or she received a safe harbor notice? When “there’s no way to know what might have been,” unlike the band Little Texas, the IRS does not let us try not to think about it, since we can’t go back again.
Instead, the IRS makes us think about it and determine the impact on individual participants.
No Harm, No Foul
If the employee is a continuing plan participant who has clearly been informed of the plan’s features and the process for electing to make deferrals, the failure to provide the notice is just an administrative error without consequence, and the employer can revise its procedures to ensure that notice distribution takes place in the future.
Exclusion of an Eligible Employee Correction
However, if the missing notice results in an employee not being able to make elective deferrals to the plan because the person also had not been informed about the plan or how to make deferrals, then the correction is the same as the EPCRS correction for exclusion of an eligible employee. When eligible employees are not given the opportunity to defer, the employer must generally deposit corrective contributions to replace the participant’s missed deferral opportunity and missed matching contribution, as defined in EPCRS.
Missed Deferral Opportunities – Safe Harbor Match Plans
For plans with a safe harbor match formula, an employee’s missed deferral is the greater of:
- 3% of compensation, or
- the maximum deferral percentage for which the employer matches at a rate at least as favorable as 100% of the elective deferral made by the employee.
In turn, the missed deferral opportunity that the employer must deposit as a corrective contribution, according to the IRS Fix it Guide updated as of May 15, 2020, amounts to 50% of the missed deferral, as defined above. The corrective contribution amounting to 50% of the missed deferral was the option available under Revenue Procedure 2013-12. However, the employer may want to consider alternative corrective contribution options provided by EPCRS for missed deferrals and eligibility errors.
Additional correction options were added in later updates to the EPCRS if the employer also provides a notice of the failure to affected participants. Although all the correction options are included in the most recent EPCRS Revenue Procedure 2019-19, it was originally Revenue Procedure 2015-28 that eliminated the requirement to contribute a QNEC if deferrals begin by first payroll on or after the three-month period when a failure to withhold occurs. Thereafter, if the deferrals begin within two years of the end of the plan year in which the operational failure occurred, the employer may contribute 25% of the missed deferral instead of 50%. Lastly, if the plan is a Qualified Automatic Contribution Arrangement, no QNEC is required if deferrals start within 9½ months of the year after the failure occurred. This deadline coincides with the extended due date of Form 5500.
To use these alternative correction options, the employer must distribute a notice to the affected participants no later than 45 days after the deferrals begin. The notice 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).
Missed Employer Match
Under all correction options for the deferral, the employer must deposit 100% of the match that would have been allocated to the participant for the missed deferral, plus lost earnings.
Other Corrective Actions
In addition to making corrective contributions as described above, the employer should distribute the missed notice as soon as possible and obtain deferral elections from the affected participants, review the plan’s procedures for issuing notices, including elections not to participate as a best practice, and maintain a calendar with due dates for notices and filing deadlines, including timely distribution of all notices. The employer must ensure that administrative procedures are changed as necessary to prevent the error from happening again. Plan operation errors are common, so as they happen, it’s important to do as our parents taught us and “Don’t Let It Happen Again!”.