Effect of a Check Notation: Void After 90 Days

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On April 2, 2015, the IRS issued Rev. Proc. 2015-28, which provides new safe harbor correction methods for errors relating to automatic contribution features, including automatic enrollment and automatic escalation of elective deferrals, in both Section 401(k) and Section 403(b) plans. Rev. Proc. 2015-28 also includes provisions encouraging the early correction of elective deferral failures that do not involve automatic contribution features. In both situations, correction now will be less expensive for plan sponsors than it would have been under the prior IRS correction procedures, which will be good news for plan sponsors.

  1. The Revenue Procedure sets forth the following new correction methods:
    Correcting Employee Elective Deferral Failures in a Section 401(k) or Section 403(b) Plan with Automatic Contribution Features: If there is a failure to implement an automatic contribution feature (including automatic enrollment and automatic escalation features) for an eligible employee, or a failure to implement an affirmative deferral election of an eligible employee who is otherwise subject to an automatic contribution feature, no employer contribution for the missed elective deferrals is required, so long as: (i) the failure does not extend beyond the earlier of (1) the 9½ month period after the end of the plan year in which the failure first occurred, or (2) the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant; (ii) notice of the failure (in the form specified in the Revenue Procedure) is provided to affected employees within 45 days of correction; and (iii) the employer contributes 100% of any employer matching contribution that would have been made on the full amount of the missed deferrals, adjusted for earnings, within two years of the year in which the failure first occurred.

    This correction method is currently scheduled to sunset by December 31, 2020, although the IRS may reconsider whether the relief will be extended.This correction method drastically reduces the amount that the employer is required to contribute to make up for missed employee deferrals, which previously was 50% of the missed employee deferrals plus 100% of the missed matching contribution.

  2. Early Correction of Employee Elective Deferral Failures in a Section 401(k) or Section 403(b) Plan (Unrelated to Automatic Contributions):
    • If an elective deferral failure is corrected within three or fewer months or if earlier, upon the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant, no employer contribution for the missed elective deferrals is required, so long as (i) notice of the failure (following the form specified in the Revenue Procedure) is provided to affected employees within 45 days of correction, and (ii) the employer contributes 100% of any matching contribution that would have been made on the full amount of the missed deferral, adjusted for earnings, within two years of the year in which the failure first occurred.
    • If an elective deferral failure is corrected after three months, but within two years after the year of the failure (or if earlier, upon the first payroll date following the end of the month after the plan administrator receives notice of the failure from an affected participant), the failure may be corrected by the employer making a contribution equal to 25% of the missed deferrals (in lieu of the higher 50% make up contribution that otherwise would be required), so long as the 45-day notice and employer matching contribution (plus earnings) described above are also provided.

This reduction in the employer’s required contribution to make up for missed deferrals from 50% to 25% will be welcome news to plan sponsors. Note that this new guidance does not change the existing Special Rule for Brief Exclusion from Elective Deferrals, contained in the IRS correction procedures, that allows for correction of elective deferral failures occurring in the first three months of a plan year, without the employer having to make any contribution for missed elective deferrals.

What Does This Mean to You?

By reducing the employer’s required contributions to correct these errors, the IRS appears to be encouraging employers to implement automatic contribution arrangements and to proactively address elective deferral failures. The guidance will be helpful to sponsors of plans that already contain automatic contribution features, including automatic enrollment and automatic escalation of elective deferrals, by reducing the costs of correcting missed elective deferrals. For plan sponsors that are contemplating adopting these features, the guidance may reduce a significant barrier to adopting those features by offering certainty and an easy method to correct inadvertent automatic contribution errors. Finally, for all plan sponsors that deal with the common problem of elective deferral failures, the guidance offers welcome relief for those who promptly identify and address such issues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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