You have the best of intentions, but still it happens: You have failed to properly withhold 401(k) or 403(b) deferrals from an employee’s pay. What do you do?
Prior to this year, existing correction methods for missed deferrals discouraged employers from adopting automatic enrollment features available to their plans. Additionally, the expense relating to these fixes resulted in delays in corrections or worse — a “catch me if you can” mentality. To encourage employers to adopt the auto-enrollment features or to correct missed deferrals in a timely manner, the Internal Revenue Service (IRS) issued Revenue Procedure (Rev. Proc.) 2015-28.
Rev. Proc. 2013-12 describes the Employee Plans Compliance Resolution System (EPCRS) correction programs for certain plan failures and errors. Rev. Proc. 2015-28 modifies, but does not supersede, Rev. Proc. 2013-12, by modifying the safe harbor correction methods. Examples in Appendices A and B provide alternative correction methods for certain employee elective deferral failures associated with automatic contribution features, which should help to encourage the early correction of employee elective deferral failures.
Prior to this recent guidance, in order to correct these errors, the employer would have to make a qualified, non-elective contribution (QNEC) for the affected participant. The QNEC would have to include not only the missed match and earnings on that match, but also 50 percent of the missed deferral, plus earnings.
Rev. Proc. 2015-28 provides alternative fixes under certain conditions. No QNEC is necessary if correct deferrals under auto-enrollment begin by the earlier of:
- 9½ months following the end of the plan year when the failure occurred
- or, in cases where the employee notifies the employer of the error, the first payroll of the second month following such notification
For other instances of missed deferrals for a period of three months or less, no QNEC is necessary if the correct deferrals start by the earlier of:
- the first payroll after the period of missed deferrals
- or the first payroll of the second month following notification by the employee if the employee identified the failure
Rev. Proc. 2015-28 provides additional modified correction methods if an employer cannot meet the requirements above. These correction methods provide for a QNEC of 25 percent of the missed deferrals, plus matching contributions and earnings (as opposed to 50 percent of missed deferrals, plus matching contributions and earnings) if the employer meets certain requirements.
The new correction methods ease the pain of missed deferrals and should be considered by employers when employee elective deferral failures are noted. If you need additional information, contact a member of the KraftCPAs employee benefits plan team. We would be happy to help you determine how you can handle a missed deferral in the most efficient and cost-effective manner.