Most of the concentration in the employee benefits world over the past year or so has been dedicated to getting up to speed on newly passed legislation, much of it COVID related, and all of the subsequently issued administrative guidance. But with all of the changes that have occurred in that time, compliance issues and corrections have remained a constant. Operational errors in a retirement plan are common under normal circumstances, and it’s even more likely that errors have occurred during the chaos of this past year. It is therefore more crucial now than ever to have measures in place to find mistakes and to know how to make the necessary corrections when the mistakes are found.
The IRS’s correction program for retirement plans (referred to as EPCRS) provides guidance and makes it easier for plan sponsors to correct certain plan errors. One common error that can arise during the administration of a 401(k) plan is the improper exclusion of an employee from making elective deferrals for a period of time. The general correction procedures for an elective deferral failure require the employer to make a contribution equal to 50% of the employee’s missed deferral. There are exceptions to the general rule that can reduce the contribution to 25% of the missed deferral if corrected within a 2-year window or 0% if corrected within a 3-month window (see this blog post for more details).
In addition to the 3-month and 2-year correction methods, an additional exception, applicable only to plans with an automatic contribution feature, permitted an employer to reduce corrective contributions to 0% if the failure did not extend beyond the end of: (1) nine and a half months after the end of the plan year in which the automatic contribution or increase should have occurred, or (2) the last day of the month following the month in which the participant advises the sponsor of the problem. This exception generally extended the period a plan could correct a deferral failure without making a contribution for a missed deferral from 3 months after the failure to nine and a half months after the end of the plan year in which the error occurred.
Unfortunately, the auto-deferral correction method under EPCRS is no longer available. The provision was only applicable for errors that occurred prior to January 1, 2021. Plan sponsors of plans with automatic contributions features might have become comfortable under the prior rule, so it is critical that they are cognizant of this sunset provision. These plan sponsors now must be quicker to recognize and fix errors to avoid having to make corrective contributions for missed deferrals. The IRS has given no indication that the exception will be renewed, but it is something to monitor and we will provide any updates as they become available.
Should you discover a plan error, any of Graydon’s employee benefits attorneys are able to assist.
