New ECPRS to Address Universal Availability Violations

September 20, 2011 ( - The next version of Internal Revenue Service’s Employee Plans Compliance Resolution System (EPCRS) is expected to provide a fix for universal availability failures in Section 403(b) plans.

The Bureau of National Affairs (BNA) reports that Jason E. Levine, a tax law specialist in the Tax-Exempt and Government Entities Division at IRS, told attendees an event sponsored by the American Law Institute-American Bar Association: “There is nothing in the current EPCRS that applies to 403(b) plans that impermissibly excluded employees that should have been able to defer.”  

The new correction procedure would be similar to a safe-harbor correction procedure under the current EPCRS that employers use for fixing missed deferral opportunities in tax code Section 401(k) plans, Levine said, according to BNA. He added that a description of the anticipated correction procedure for Section 403(b) plans can be found in a letter on IRS’s Employee Plans Compliance Unit web pages.  

The letter says plan sponsors should make a fully vested contribution for each otherwise eligible employee for each year the employee was improperly excluded from making a salary deferral to the section 403(b) plan. A fully vested contribution is one in which the employee is entitled to the full amount of the contribution, whether or not the employee leaves the service of the employer. Additionally, if the employee would have been entitled to a matching contribution, then the public school should make an additional contribution to make the employee whole.   

The agency provides two common methods in which the make-up contribution to the employees may be calculated. We provide two common methods here – both which utilize the concept of “lost opportunity cost,” which represents the benefits lost to the employee. Generally, the lost opportunity cost represents the loss of the tax benefit to the employee for having paid income tax on salary that could have been deferred and the loss of the ability of the salary deferral to grow tax-free in the section 403(b) plan. The Service has determined that the lost opportunity cost is equal to approximately fifty percent (50%) of the amount of the salary deferral the employee could have made to the section 403(b) plan.   

The first method for calculating the contribution for the excluded employee is based on the average deferral rate of similarly situated employees. The employer determines the “average deferral percentage” (ADP) of the affected employee’s group (i.e., highly or non-highly compensated). Once the appropriate ADP is determined for each year affected, each excluded employee is entitled to a fully vested contribution equal to 50% of the employee’s compensation multiplied by the average deferral percentage for that year. If the employer matched the salary deferrals made under the plan, the employee is also entitled to any related matching contribution attributable to salary deferrals, using 100% and not 50% of the missed salary deferral.  

In addition, in lieu of calculating the average deferral percentage, the IRS said an employer may deem the average deferral percentage to be equal to 3% of compensation. In this case, the employer would make a fully vested contribution for the excluded employee equal to 1.5% multiplied by the employee’s compensation for each year of exclusion. If the employer matched the salary deferrals made under the plan, the employee would be entitled to any related matching contribution attributable to a 3% salary deferral.   

The IRS letter is at