Employee Plans Compliance Resolution System – Q&A #2

by King & Spalding

[author: James P. Cowles]


If an employer unintentionally fails to comply with the qualification requirements of the Internal Revenue Code with respect to its qualified plan, the employer may be able to avoid disqualification of the retirement plan if the failure is corrected using the Employee Plans Compliance Resolution System ("EPCRS").

King & Spalding has assisted many clients in correcting retirement plan failures using EPCRS. We thought it would be helpful to include Q&As in the newsletter describing EPCRS correction methods for common document failures and operational failures.

We encourage you to email your questions to us at kraskin@kslaw.com. We will attempt to address your questions in future newsletters. Obviously, we cannot provide specific advice in a newsletter article, but we will provide general information to assist you in answering your questions about EPCRS. For reference, the current EPCRS guidance is contained in IRS Revenue Procedure 2013-12.


Question: Does EPCRS provide a correction method if an employer fails to timely notify employees of their eligibility to participate in a § 401(k) plan?

Answer: Yes, EPCRS provides correction methods for "missed deferral opportunities" for pre-tax contributions, after-tax contributions, catch-up contributions, matching contributions, Roth contributions and contributions made to a safe harbor 401(k) Plan. This Q&A describes the EPCRS correction methods for the missed deferral opportunity for pre-tax contributions, after-tax contributions and applicable matching contributions. The correction methods for catch-up contributions, Roth contributions and safe harbor 401(k) contributions will be addressed in a separate Q&A.

Additionally, this failure may be eligible for self-correction, which means a formal application to the IRS may not be required (Refer to EPCRS Q&A 1 for more information on self-correction). All corrective contributions are subject to the applicable contribution limits of the plan and the Internal Revenue Code.

The first step in correcting this failure is to contact the affected employees and inform them of their plan eligibility.

Pre-Tax Contribution Corrective Action
The employer must make a Qualified Non-elective Contribution (QNEC) to the plan on the employee's behalf equal to 50% of the employee's "missed deferral." The missed deferral is determined by multiplying the actual deferral percentage (commonly referred to as the "ADP") for the employee's group (either highly compensated or nonhighly compensated) by the employee's compensation for the period of the missed deferral opportunity. The QNEC must be fully vested at all times.

After-Tax Contribution Corrective Action
The employer must make a QNEC to the plan on the employee's behalf equal to 40% of the actual contribution percentage (commonly referred to as the "ACP") for the employee's group (either highly compensated or nonhighly compensated) times the employee's compensation for the period of the missed deferral opportunity. If the ACP is based on both matching and after-tax contributions, the portion of the ACP attributable to only after-tax contributions may be used in place of the entire ACP.

Matching Contribution Corrective Action
If the employee was eligible for employer matching contributions on pre-tax and/or after-tax contributions during the period of the missed deferral opportunity, the employer must make a corrective employer nonelective contribution to the plan on the employee's behalf equal to the matching contribution the employee would have received had he or she made the pre-tax and/or after-tax contribution amounts described above. The employer nonelective contribution may be subject to the Plan's vesting schedule.

Alternative Corrective Action
An employer is not required to use the correction methods described in the EPCRS. If an employer does use the correction methods described in EPCRS, the corrective action will be deemed to comply with EPCRS. We generally recommend that employers use the EPCRS correction methods if at all possible.

However a failure is corrected, we strongly suggest employers draft a detailed memorandum and place it in the file describing how the correction was made and how the correction method was determined.

All of the corrective contributions must be adjusted for earnings for the period of the missed deferral opportunity. Appendix B of the EPCRS provides several methods to determine earnings on corrective contributions.

Unless the employer elects to self-correct the failure, the employer will need to complete Form 8950, Application for Voluntary Correction Program, and Form 8951, Compliance Fee for Application for Voluntary Correction Program, and file them with the IRS in order to receive a Compliance Statement.

The Compliance Statement is issued by the IRS and describes the terms and time period within which the proposed corrections must be implemented. The Compliance Statement also provides that the IRS will not treat the plan as failing to satisfy the applicable requirements of the Code on account of the failures(s) described in the Compliance Statement if the conditions of the Compliance Statement are satisfied. A Compliance Statement is not issued if the failure is self-corrected by the employer and no submission is made to the IRS.

We hope you found this Q&A helpful. If you have specific questions related to a failure in your plan, or any other matter related to employee benefits or executive compensation, please contact us.

Author, James P. Cowles*, Atlanta, +1 404 572 3455, jcowles@kslaw.com

*Non-lawyer Employee Benefits Consultant .


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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