Welcome relief for 401(k) and 403(b) plan sponsors was provided by the IRS in their recent Revenue Procedure 2015-28. Penalties for automatic contribution, automatic contribution increases (escalation), and enrollment mistakes have been greatly minimized under the revised self-correction program available from the IRS – the Employee Plans Compliance Resolution System (EPCRS).  Our BRI consultants in the past cautioned clients looking at automatic enrollment that there is a big burden on the payroll department to get deductions started properly and on time. These new rules virtually eliminate the penalties that used to be imposed, so we will now be encouraging more clients to adopt this popular enrollment feature.

GENERAL RULE

Once an employee becomes eligible for a 401(k) or 403(b) plan under automatic enrollment provisions, deductions of the basic amount must begin from his or her paycheck. For plans with affirmative enrollment, once an eligible employee submits an election form for participating in the plan, deductions must begin as soon as possible following receipt of the form.

Prior to Rev. Proc. 2015-28, a failure to implement deductions timely or properly have resulted in an expense to the plan sponsor of a Qualified Non-Elective Contribution (QNEC) equal to 50% of the amount that should have been deducted, plus any related employer match, plus investment earnings. A small mistake can sometimes become very costly very quickly.

Rather have one of our Pension Specialists explain this over the phone? Request contact here!

NEW RULE FOR AUTOMATIC ENROLLMENT PLANS

If you identify a mistake within nine and a half (9 ½) months after the end of the plan year in which the mistake occurred, then the QNEC is waived as long as these three steps are taken:

• The proper deduction is processed from the participant’s paycheck no later than the earlier of:
  • The first pay period on or after the last day of the 9 ½ month period after the end of the plan year in which the failure occurred; or
  • The first pay period after the end of the month in which the participant notified the employer of the mistake
• A notice of the failure is given to the participant(s) no later than 45 days after the date the correct deferrals begin from payroll; and
• Any matching contributions that would have been made to the participant are deposited on his or her behalf. Earnings must be calculated on the matching contribution.

Example of the new rule for automatic enrollment plans

Rose had worked at Fantasy Floral for 6 months and became eligible for the Fantasy Floral 401(k) plan on August 1, 2014 under the plan’s automatic enrollment provisions. Under the automatic enrollment, 3% of pay was to have been deducted from Rose’s paycheck. The plan has an employer match of 50% on the first 3% of pay contributed to the plan.

When the TPA for Fantasy Floral reviewed their 2014 census in February 2015, they identified the fact that Rose did not have any deductions taken for 401(k) in 2014. They notified Fantasy Floral that in order to fix this mistake they would have to do the following:

1. Start deductions from Rose’s paycheck no later than the first pay period in March 2015
2. By no later than October 15, 2015, deposit the following to Rose’s account in the plan:
   1. The matching contribution that Rose would have been eligible to receive in 2014,
   2. The calculated earnings on the match (earnings are to be calculated based on the plan’s default investment alternative.)
3. Provide Rose a notice within 45 days of the correction that contributions had begun.

NEW 3-MONTH RULE for ALL 401(k) or 403(b) PLANS

If you identify an enrollment or escalation mistake within three (3) months, then no QNEC is required as long as these three steps are taken:

• The proper deduction is processed from the participant’s paycheck no later than the earlier of:
  • The first pay period on or after the initial deduction should have taken place; or
  • The first pay period after the end of the month in which the participant notified the employer of the mistake.
• A notice of the failure is given to the participant(s) no later than 45 days after the date the correct deferrals begin from payroll; and
• Any matching contributions that would have been made to the participant are deposited on his or her behalf. Earnings must be calculated on the matching contribution too, if they would normally have been deposited with the 401(k) contributions.

Example of the new 3-month rule

Carter had worked at Empire Engineering for 6 months and became eligible for their plan on May 1, 2015. He would also be eligible for the employer match of 50% on the first 5% of pay contributed to the plan. The match is deposited each pay period.

Carter turned in to the Empire Engineering payroll department on April 20, 2015 his election form to have 5% of pay deducted for 401(k). The first deduction should have been processed on May 8, 2015. When no deduction was taken out of that check, Carter looked again on his May 22, 2015 paycheck, and found that there was still no deduction for 401(k) taken. He notified the Empire Engineering payroll department.

Empire Engineering must begin Carter’s 401(k) deductions no later than June 5, 2015 – the first pay period after the end of the month in which they were notified of their mistake. They must also make up the matching contribution for the two missed pay periods in May, plus the earnings on the match that Carter missed out on. Empire Engineering would have to provide Carter a notice no later than July 20, 2015 that his deferrals had begun.

SELF CORRECTION for ALL 401(k) or 403(b) PLANS

If you identify an enrollment or escalation mistake after 3-months, but before the end of the second year following the plan year, in which the mistake occurred, then you are still within the Self Correction Program time frame. In the event a correction is processed during this time frame, then a QNEC of 25% of the amount that would have been contributed to the participant along with these three steps:

• The proper deduction is processed from the participant’s paycheck no later than the earlier of:
  • The first pay period on or after the last day of the second plan year following the year in which the failure occurred; or
  • The first pay period after the end of the month in which the participant notified the employer of the mistake
• A notice of the failure is given to the participant(s) no later than 45 days after the date the correct deferrals begin from payroll; and
• A QNEC of 25% of the missed deductions, any matching contributions that would have been made to the participant are deposited on his or her behalf. Earnings must be calculated on the QNEC and matching contribution.

Example of the new self-correction rule

Avery had worked at the Crazy Zoo for 6 months and became eligible for the Crazy Zoo 401(k) plan on August 1, 2013 and he submitted his election form to the payroll department opting for a deduction of 3% of pay. The payroll department failed to implement this deduction.

The auditor for the Crazy Zoo 401(k) plan found that Avery’s election form had never been processed when they were performing their 2014 audit in August 2015, they identified the fact that Avery did not have any deductions taken for 401(k) in 2013 or 2014. They notified Crazy Zoo that in order to fix this mistake they would have to do the following:

1. Start deductions from Avery’s paycheck no later than the last payroll in December 2015.
2. By December 31, 2015, deposit the following to Avery’s account in the plan:
   1. a QNEC of 25% of the amount that should have been deducted from Avery’s paycheck in 2013 and 2014 (3% of his pay from August 1, 2013-December 31, 2015)
   2. Deposit the matching contribution that Avery would have been eligible to receive in 2013 and 2014.
   3. Deposit the calculated earnings on the QNEC and match that will be deposited for Avery as if they had been deposited timely.
3. Provide Avery a notice within 45 days of the correction that contributions had begun.

SUMMARY

These rules are welcome relief to all sponsors of 401(k) and 403(b) plans, and open the door to more companies opting for automatic enrollment. The rules are in effect as of April 2, 2015, and they have a sunset date of December 31, 2020. Plan Sponsors will also need to document their correction under the EPCRS rules, so talk to your ERISA attorney or TPA, or contact us here at BRI if you’re looking for help in correcting a mistake.

Correcting small mistakes now can save time, fees and expense. If mistakes are found in an IRS audit, you no longer have the option for self-correction, and sanctions can be added to boot. Let the specialists at BRI help you with your plan. We are your #1 Resource for Retirement Plan Administration!

photos courtesy of olovedog and digitalart / FreeDigitalPhotos.net