Confero Summer 2015: Issue 11 | Page 9

E P C R S C o rr e c t i o n P r o c e d u r e Old Correction Procedure. Under the old EPCRS rules, correction of these failures entailed making a so-called qualified nonelective contribution (QNEC) on behalf of the employee affected by the mistake. The amount of the QNEC was 50% of the of the deferral percentage for the employee’s group in the plan (i.e., either the highly compensated group or nonhighly compensated group) multiplied by the employee’s compensation for the year. The old rules also required corrective contributions for missed matching contributions and lost earnings. This was criticized for providing affected employees with a windfall, because they received plan contributions in addition to their full salary. Modified Procedure. Without overriding existing EPCRS procedures contained in Revenue Procedure 2013-12, the new rules provide a safe harbor for certain deferral failures where the failure to implement an automatic contribution or an affirmative deferral election does not extend beyond the 9½ month period after the end of the plan year of the failure. This is generally the extended filing deadline for the plan’s annual report on Form 5500 during the preparation of which implementation errors are frequently discovered. Under the safe harbor, if correct deferrals begin by the first payment of compensation after the earlier of this date or the date the plan sponsor is notified of the failure by the affected employee, a QNEC will not be required. The safe harbor is limited to employees subject to an automatic contribution feature. There are two additional conditions for the safe harbor. The first requires that the affected employee receive notice of the failure (including the percentage of eligible compensation that should have been deferred and the date deferrals should have begun) within 45 days after correct deferrals begin. The plan sponsor must also make a corrective contribution for missed matching contributions adjusted for earnings that would have been earned on the match based on the employee’s designated plan investment or, if none, the plan’s default investment. The deadline for these contributions will generally be the last day of the second plan year following the plan year for which the failure occurred. Safe Harbor for Early Correction. A second safe harbor correction method applies where correct deferrals begin by the first payment of compensation following the last day of the three-month period beginning after a deferral failure. In this instance, a QNEC for missed deferrals will not be required, although a corrective contribution for matching contributions and earnings, calculated in the same manner as under the first safe harbor, will be due. Notice of the failure with content tailored to the situation must be furnished to the affected employee within 45 days after correct deferrals begin. As under the first safe harbor, notification of a deferral failure from an affected employee before the three-month deadline will accelerate the date when corrective deferrals must begin. Third Safe Harbor. The new EPCRS correction procedure provides a third safe harbor when correct deferrals begin more than three months afte r the deferral failure first occurred but no later than the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred. If the affected employee notifies the plan sponsor of the failure before this date, correct deferrals will need to have begun by the first payroll date on or after the end of the month in which this notification was made in order to qualify for the third safe harbor. The advantage of qualifying under the third safe harbor is that the generally applicable 50% QNEC will be replaced by a QNEC equal to 25% of the missed deferrals. This QNEC and employer contributions to make up for missed matching contributions and earnings must be made by the deadline for self-correcting significant operational failures under EPCRS. This is the last day of the second plan year following the plan year for which the failure occurred which may cause problems for plan sponsors who are not well advised, since it is somewhat earlier than the date by which correct deferrals must have begun under the third safe harbor. Another uncertainty regarding the third safe harbor is whether the earnings adjustment must be made not only for the missed match but also the 25% QNEC. The third safe harbor is conditioned on furnishing a participant notice of the failure within 45 days after the beginning of correct deferrals. Effective Date. Revenue Procedure 2015-28 is effective April 2, 2015, but since it modifies the existing revenue procedure containing the fundamental terms of the EPCRS program, the new safe harbors should be available for all future corrections made under that procedure, even if a failure preceded April 2, 2015. Importance of EPCRS. Since they are conditioned on timeliness, the new safe harbors reward diligent oversight of plan operations. By reducing or eliminating QNECs, the new EPCRS correction procedures make it easier and less costly to preserve a plan’s qualified status. This is an ongoing effort by the IRS. Several days before Revenue Procedure 2015-28 was issued, the IRS released a grab-bag of impending changes to EPCRS, the most notable of which was the start of an effort to make correction for plan overpayments more flexible. As it allocates assets away from traditional programs certifying plan qualification, such as the determination letter program, an EPCRS compliance statement will become increasingly important in demonstrating a plan’s qualified status. Confero | 7