Background. Under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”), employers can correct operational errors that occur in the administration of their tax-qualified retirement plans and avoid fines or sanctions if these errors are later discovered during an IRS audit.

In recent weeks, the IRS has released two significant updates to the EPCRS. The updates make correcting several common errors less costly, but plan sponsors may need to act promptly to identify and correct errors in order to benefit from these changes.

Correction Updates.

• The most significant update establishes new methods to correct mistakes in implementing deferral elections under 401(k) and 403(b) plans.
• The other update (i) simplifies the correction of plan overpayments, and (ii) decreases filing fees for loan and required minimum distribution errors.

Traditional Method for Correcting Deferral Errors. One of the most common errors in 401(k) and 403(b) plan administration is the incorrect implementation of a participant’s deferral election. This error can occur for many different reasons, including:

• Not following a plan’s automatic enrollment or automatic deferral escalation provisions;
• Improperly excluding eligible employees; or
• Incorrectly implementing a participant’s affirmative deferral election (i.e., the participant elects to defer 6% but only 3% is actually deferred).

In the past, the IRS generally required the employer to make a corrective contribution to the affected participant’s account equal to (i) 50% of the missed deferral (i.e., the difference between the participant’s election and what was actually deferred), and (ii) 100% of any matching contributions the participant did not receive as the result of the error, both adjusted for lost earnings.

New Methods for Correcting Deferral Errors. As an alternative to the traditional correction method, the IRS has introduced the following new correction methods that decrease the amount of corrective contributions needed when errors are quickly identified and corrected:

• Automatic Enrollment or Escalation Errors. If an employer fails to automatically enroll an eligible employee or automatically escalate a participant’s deferral percentage, the employer may correct the failure by: (i) implementing the correct deferral within 9½ months following the end of the plan year in which the error first occurred (or the month after the month in which the employer is notified by the employee, if earlier), (ii) notifying the employee of the correction, and (iii) making a contribution to the employee’s account equal to any matching contributions that were not made as a result of the error, with earnings. No contributions related to the missed deferral are required.
• Deferral Election Errors.
  • • If an employer fails to implement a deferral election (for any reason) and the error lasts no longer than 3 months, the employer may correct the failure by: (i) implementing the correct deferral within 3 months following the date the error first occurred (or the month after the month in which the employer is notified by the employee, if earlier), (ii) notifying the employee of the correction, and (iii) making a contribution to the employee’s account equal to any matching contributions that were not made as a result of the error, with earnings. No contributions related to the missed deferral are required.
    • If an employer fails to implement a deferral election (for any reason) and the error lasts longer than 3 months, the employer may correct the failure by: (i) implementing the correct deferral before the end of the second plan year following the plan year in which the error first occurred (or the month after the month in which the employer is notified, if earlier), (ii) notifying the employee of the correction, and (iii) making a contribution equal to 25% of the missed deferrals and 100% of the missed match, with earnings.

  	Automatic Enrollment and Escalation Errors	Deferral Election Errors
  Correction Timing	9 1/2 months following the end of the plan year	3 months	End of the second plan year following the plan years
  Deferral Correction	None	None	25%
  Match Correction	100%	100%	100%

   

  Additional Useful Changes. The IRS also made correction of other common administrative errors easier and less expensive:

  • • Simplified Correction of Plan Overpayments. Previously, in order to correct an error that resulted in an overpayment to a plan participant, the IRS required that the employer ask that the participant return the amount of the overpayment to the plan. Now the IRS acknowledges that it is not necessary to request the participant to return the overpayment in all situations. However, the IRS has not offered any examples of when alternative corrections may be appropriate.
    • Lower VCP Fees for RMD and Loan Errors. The IRS substantially reduced the fees that employers must pay to correct errors relating to failing to timely pay required minimum distributions and to correct errors that relate to the administration of plan loans. Instead of being based on the size of the plan, the new fee schedule is based on the number of affected participants, which typically results in reduced filing fees for large plans.
  Next Steps. To make the best use of the new correction methods, employers should (i) timely identify and correct such errors, and (ii)consider implementing processes to periodically review plan administration. If these problems are identified quickly, they can be corrected with significantly reduced correction costs.

  Contact Information. For more information, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836)