“We recently changed payroll systems, which resulted in a failure to withhold mandatory contributions from several employee paychecks until the error was discovered. I looked to the Internal Revenue Service (IRS) guidance about the Employee Plans Compliance Resolution System (EPCRS), but there appears to be no mention of employee mandatory contributions in EPCRS at all. Am I missing something?”
Michael A. Webb, vice president, Cammack Retirement Group, answers:
No, you are indeed accurate that EPCRS makes no mention of employee mandatory contributions. EPCRS references three general contribution types; employee elective deferrals, after-tax employee contributions, and employer contributions (which are broken down into certain subsections into two contribution types, non-elective and matching).
So, how does a plan sponsor correct missed mandatory contributions? Well, despite the fact that there is no specific reference to employee mandatory contributions, a closer reading of EPCRS reveals that all contributions are treated as employer contributions for purposes of utilizing the correction measures in EPCRS, with the sole exceptions being a) elective deferrals, and b) employee after-tax contributions. Since we know that an employee mandatory contribution is NOT an elective deferral (it is not subject to the 402(g) elective deferral limit), and we also know that the contribution is pre-tax, we know that the exceptions are not met.
Thus, employee mandatory contributions are treated as employer contributions for EPCRS purposes. A missed employee mandatory contribution is corrected in the same fashion under EPCRS as a missed employer contribution.
As an aside, you should consult with benefits counsel well versed in EPCRS corrections before proceeding with such corrections.
Thank you for your question!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.