The second round of revisions to IRS’ Employee Plans Compliance Resolution System in a week focused on failures in automatic enrollment and escalation in defined contribution retirement plans. The procedural changes from the agency also addressed DC plans’ automatic employee contribution features that experience short-term elective-deferral failures.
The procedural changes in Revenue Procedure 2015-28 were released April 2 and took effect immediately. On March 27, IRS released Rev. Proc. 2015-27, which featured new options for correction methods to recoup participant overpayments and lower compliance fees for participant plan loan errors, among other changes.
The changes April 2 to automatic features included suspension of a required qualified non-elective contribution for missed elective deferrals if the error does not extend beyond the end of the 9½ months after the end of the plan year of the failure and satisfies several specific conditions listed in the revenue procedure. They also create a rolling correction period for elective deferral errors lasting three months or less in which a QNEC is no longer required.
The latest guidance modifies but does not supersede Rev. Proc. 2013-12.
Implementation Errors Common, Commenters Say
Commenters expressed concern that the cost of correcting implementation failures resulting from auto-contribution options in DC plans discourages employers from offering the features because implementation errors are common with plans with these features, IRS said.
In addition, commenters representing employer plans said current EPCRS safe harbor correction methods for exclusion of eligible employees create a “windfall” for affected employees because they receive both their full salary and a 50-percent makeup contribution, IRS said. The commenters argue that this correction “overcompensates” participants for failures that last a short time because the participants usually have a chance to increase their elective deferrals later. IRS attempts to address these issues in the latest revenue procedure.
IRS said the 50-percent makeup corrective contribution was aimed at recognizing the lost opportunity value if an employee failed to have a portion of his or her retirement savings from payroll accumulate earnings tax-deferred — assuming the participant would not have a chance to increase elective deferrals later to make up for the plan sponsor’s erroneously missed contribution.
The new document gives alternative safe harbor earnings calculations for some failures to implement auto-contribution features, among other points.
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