Typically this time of year no one is praising the IRS. Many of us are still searching for those last few donation receipts or the 1099 we put somewhere we wouldn’t forget it, or scrambling to find the funds to pay a balance due. But April 2015 will be remembered by employers who sponsor retirement plans as “that time the IRS got it right”.
When errors occur in retirement plans, the IRS has a program called the Employee Plans Compliance Resolution System (EPCRS) under which mistakes are corrected. EPCRS is updated via Revenue Procedures issued by the IRS and prescribes three ways to correct errors: Self-Correction Program (SCP), Voluntary Correction Program (VCP) and Audit Closing Agreement Program (Audit CAP). EPCRS defines which types of errors are eligible for correction under each program. This article highlights changes to EPCRS for the following errors:
- Certain overpayments
- Participant loan failures
- Corrections for missed deferrals in 401(k) and 403(b) plans
Revenue Procedure 2015-27, effective July 1, 2015
This RevProc provides relief to plan sponsors in the areas of overpayment and participant loan failures. Overpayment errors generally arise from a mistake made by the plan sponsor in the calculation of a distribution and previous guidance indicated that a plan sponsor had to first demand repayment from the plan participants or beneficiaries as their first step toward correction. What a difficult position to be in as the employer! First you made a mistake, then you are forced to beg for repayment from a retiree who may need every dollar he/she has to make ends meet…or from a former employee who already spent the distribution on medical expenses.
Good news, in many cases the employer no longer has to go begging for money to fix their own mistake. Depending on the circumstances, the employer may have the option to make the plan whole with a contribution, or adopt a retroactive amendment to the Plan.
With respect to participant loans, loan failures can occur for various reasons. The most common is when the employer fails to timely establish loan repayments through payroll. In this scenario, the loan becomes a distribution and is taxable to the participant, certainly not the result intended by either party. This type of failure must be corrected under VCP and previously the VCP fees were based on the number of plan participants, which could be thousands of dollars for a large plan. This RevProc modifies the basis for fees from plan participants to the number of loan failures. A plan with 13 or fewer loan failures now only pays $300 in VCP fees.
While this RevProc is effective July, 2015, early adoption is permitted as of March 27, 2015.
Revenue Procedure 2015-28, effective April 2, 2015
This RevProc is the best news for plan sponsors we have seen in years! The most common plan errors we discover in our audit practice center around a plan sponsor’s failure to timely implement deferral elections. These have increased as employers adopted automatic enrollment features. The corrective contributions to correct missed deferral errors can be costly to the employer, and placing a burden on the employer is contradictory to the IRS’ goal of increasing the number of employees covered by employer-sponsored retirement plans.
The first change to EPCRS is for those plans with an automatic contribution feature (auto enrollment or auto increases). As long as the proper amount of deferrals begin no later than month after the month that the employee notifies the employer of the error, OR if the error is discovered by the employer, within 9 ½ months after the end of the plan year in which the failure occurred, then there is no corrective contribution required for the missed deferral.
The second change relates to implementing deferral elections made by participants. If the error is discovered and the correct deferral implemented within 3 months of the error or in the month after the month that the employee notified the employer of the error, there is no corrective contribution required for the missed deferral.
Finally, for any errors that are not found and corrected within the time frames specified for the two items above, but are found and corrected within the EPCRS self-correction period, the employer corrective contribution is reduced from 50% to 25% of the missed deferral.
In ALL of the cases above, the affected employee(s) must be notified within 45 days and a corrective contribution for missed matching contributions and lost earnings must be made. The latter part means that you still have to calculate the missed deferrals in order to know what the missed match is, but it saves a fair amount of money because you are making either zero or a 25% corrective contribution for the missed deferral.
RevProc 2015-28 gives specific requirements for the notice to be given to employees as well as specifics on how lost earnings are to be calculated, especially when the participant has no established account and no investment elections in place.
All of these are good news for plan sponsors. If you have questions specific to your plan, please contact your client service representative at BeachFleischman, or contact CariAnn Todd, the Director of our Employee Benefit Plan Audit group via the form below.
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