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.
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