The Internal Revenue Service (IRS) says a new revenue procedure, 2015-28, “modifies but does not supersede” an earlier revenue procedure, 2013-12, which in part defines methods for plan sponsors to voluntarily correct issues with plan “auto features” so as to avoid jeopardizing their plans’ tax-advantaged status.
In short, the 2015-28 revenue procedure modifies the safe harbor correction methods and examples in Appendices A and B of the 2013-12 revenue procedure to provide additional leeway and alternative correction methods for employee elective deferral failures. As explained by the IRS, these elective deferral failures usually occur when a plan sponsor misses elective deferrals for eligible employees who should be subject to automatic plan features—whether automatic enrollment or automatic deferral escalation—within a 401(k) plans or 403(b) plan.
The 2015-28 revenue procedure explains that “if a failure to implement an automatic contribution feature for an affected eligible employee, or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature, does not extend beyond the end of the 9.5 month period after the end of the plan year of the failure,” no qualified non-elective contribution (QNEC), as defined in Section 1.401(k)-6 of the IRS’s income tax regulations, for the missed elective deferrals is required.
For this new safe harbor to apply, however, the following conditions must be satisfied:
- Correct deferrals must begin no later than the earlier of: 1) the first payment of compensation made on or after the last day of the 9.5 month period after the end of the plan year in which the failure first occurred for the affected eligible employee, or 2) if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the last day of the month after the month of notification.
- Notice of the failure that satisfies specified requirements in new Section .05(8)(c) of Appendix A of the 2013-12 revenue procedure is given to the affected eligible employee no later than 45 days after the date on which correct deferrals begin.
- Corrective contributions to make up for any missed matching contributions are made in accordance with timing requirements under IRS self-correction program (SCP) for significant operational failures (as described in Section 9.02 of the 2013-12 revenue procedure) and are adjusted for earnings, vis a vis Section 9.04 of 2013-12 revenue procedure.
The new revenue procedure also impacts the calculation of earnings for certain failures to implement automatic contribution features.
As explained by the IRS, “this revenue procedure provides an alternative safe harbor method for calculating earnings for employee elective deferral failures under Section 401(k) plans or Section 403(b) plans that have automatic contribution features and that are corrected in accordance with the procedures in Section 3.02(1) or 3.03 of this revenue procedure.”
If an affected eligible employee has not affirmatively designated an investment alternative, missed earnings may be calculated based on the plan’s default investment alternative, provided that, with respect to a correction made in accordance with the procedures in Section 3.02(1) of the new revenue procedure, any cumulative losses reflected in the earnings calculation will not result in a reduction in the required corrective contributions relating to any matching contributions.
A safe harbor correction method for employee elective deferral failures that extend beyond three months but do not extend beyond the normal self-correction program period for significant failures is also provided.
The IRS’s explanation continues: “This revenue procedure creates a safe harbor correction method for employee elective deferral failures if the period of failure exceeds three months (or the conditions for the safe harbor correction method described in Section 3.02 or 3.03(1) are not met by the plan sponsor). This safe harbor correction would permit the plan sponsor to make a corrective contribution equal to 25% of the missed deferrals (25% QNEC) in lieu of the higher QNEC required in Sections .05(2)(b) and .05(5)(a) of Appendix A and Section .02(1)(B) of Appendix B to Rev. Proc. 2013-12.”
In order to use this safe harbor correction, the plan sponsor must satisfy five conditions outlined in the full text of the 2015-28 revenue procedure. For example, the correct deferrals must begin no later than the earlier of 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. Or, if the plan sponsor was notified of the failure by the affected eligible employee, the correct deferrals must be made with the first payment of compensation made on or after the last day of the month after the month of notification.
See the full text of 2015-28 for additional explanation and language underlying the safe harbor changes.