Author, James P. Cowles*, Atlanta, +1 404 572 3455, jcowles@kslaw.com.
The IRS recently made helpful revisions to the Employee Plans Compliance Resolution System ("EPCRS). EPCRS is an IRS program that permits plan sponsors to correct certain retirement plan errors and avoid substantial penalties, including a possible plan disqualification. The full text of EPCRS is here.
The revisions to EPCRS were made by IRS Revenue Procedure 2015-27 and IRS Revenue Procedure 2015-28.
Revenue Procedure 2015-27
Increased Flexibility for Overpayment Corrections
An overpayment failure is a payment made to a participant or beneficiary in excess of the amount permitted under the terms of the plan or an Internal Revenue Code ("Code") limitation. For example, a benefit calculation error may result in a pension plan making monthly payments in excess of the benefit amount permitted under the plan's terms.
Before the changes made by Rev. Proc. 2015-27, plan sponsors were generally required to take reasonable steps to have overpayments returned to the plan, including contacting the person to whom an overpayment was made and requesting that he or she return the excess amount, plus earnings.
Rev. Proc. 2015-27 permits a plan sponsor, or someone else (e.g., a service provider that made the overpayment error), to contribute an amount equal to the overpayment, plus earnings, to the plan without requesting a return of the excess amount from the recipient. Alternatively, the plan may be retroactively amended to permit the overpayment.
[K&S Insight: Unfortunately, it appears that plan sponsors may still need to contact participants and/or beneficiaries and inform them that the overpayment was not eligible for rollover.]
The IRS has requested further comments regarding methods of correcting overpayments and it intends to issue additional guidance in the future on this issue.
Extra Time to Correct Excess Annual Additions
Excess annual additions under Code Section 415(c) may now be "self-corrected" by distributing excess amounts no later than 9½ months after the plan's limitation year (currently excess annual additions must be distributed within 2½ months after the plan's limitation year). The Code Section 415(c) limit for 2015 is the lesser of $53,000 or 100% of the participant's compensation.
Model Forms
The model forms found in EPCRS Appendix C have been replaced by a new Form Series, 14568-A through 14568-I. The model acknowledgement letter found in Appendix D of EPCRS has also been revised.
User Fees Reduction for RMD and Loan Failures
The fees for correcting a required minimum distribution failure or a plan loan failure have been significantly reduced to further encourage plan sponsors to use EPCRS.
Determination Letter Applications
Currently, a voluntary correction program (VCP) application under EPCRS for a correction that requires a corrective amendment to a plan must generally also include an application for a favorable determination letter. A favorable determination letter application will no longer be required if (1) the corrective amendment is made to a volume submitter or prototype plan and the plan sponsor has reliance on the IRS opinion or advisory letter following the adoption of the amendment or (2) more than 12 months has passed since the plan was terminated and all assets have been distributed.
Longer Time to Adopt Amendments
Plan sponsors will have until the later of (a) 150 days after the date of an IRS compliance statement or (b) 90 days after a favorable determination letter is issued to adopt a corrective amendment.
The changes made by Revenue Procedure 2015-27 are effective July 1, 2015. However,plan sponsors may elect to apply the new procecures earlier.
Revenue Procedure 2015-28
Currently, EPCRS has the same correction method for a failure to implement either an automatic elective deferral (e.g., automatic enrollment or escalation) or an affirmative election made by a participant.
The current correction method requires the plan sponsor to make a qualified nonelective contribution (QNEC) to the plan on behalf of affected participants equal to the sum of 50% of the amount that would have been deferred had the elective deferral been timely implemented, plus 100% of the matching contribution that would have been received, plus earnings.
The popularity of automatic enrollment and escalation arrangements in 401(k) and 403(b) plans has increased in recent years. The downside to these arrangements (and a reason why some employers do not include such arrangements in a plan) is that if the "automatic" contribution is not timely implemented, the resulting failure and correction can be expensive (these failures are often not discovered for months or years later during an audit).
To encourage plan sponsors to include automatic enrollment and escalation design features in their plans, Revenue Procedure 2015-28 reduces the correction cost if the correction is identified and completed timely, as follows:
Automatic Deferral Correction: If an automatic deferral election or an affirmative election to contribute more than the automatic contribution rate is not timely implemented, a QNEC equal to 50% of the missed elective deferrals is not required if the elective deferrals, at the correct rate, begin no later than the earlier of (1) the first payroll date following the period ending 9 ½ months after the end of the plan year in which the failure occurred, or (2) the first payroll date following the end of the month after the participant notifies the plan administrator of the failure.
The plan sponsor must still make a QNEC contribution for any missed matching contributions, plus earnings. If the participant did not make an affirmative investment election, the earnings may be determined based on the default investment option under the plan. The QNEC must be made no later than the end of the second plan year following the year in which the failure first occurred.
Affected participants must be notified within 45 days of the correction. The notice must explain the failure and correction, state that a contribution has been made to compensate for missed matching contributions and the participant may increase his or her deferral election to make up for missed deferrals, and include contact information for any questions.
Failures Unrelated to Automatic Contribution
Two safe harbor correction methods for elective deferral failures unrelated to automatic contributions are also included in the Revenue Procedure 2015-28, as follows:
(1) If the failure continues for less than four months, no QNEC for the missed deferral opportunity is required if (a) the correct deferral contribution begins no later than the earlier of (i) the first payroll beginning three months after the failure occurred or (ii) the first payroll after the end of the month in which the plan administrator was notified of the failure, (b) the participant is notified of the failure no later than 45 days after the correction; and (c) a matching contribution is made, including earnings.
(2) If the failure extends beyond three months, but not beyond the second plan year following the plan year in which the error occurred, the failure may be corrected by making a QNEC contribution equal to 25% of the missed deferral (plus any missed matching contributions and earnings). Notice requirements similar to item (1) apply to here as well.
These new safe harbor correction methods are available immediately and can be made for any failures occurring on or before December 31, 2020.
If you have any questions, or if King & Spalding can assist you in any way, please give us a call.
*Non-lawyer Employee Benefits Consultant
