IRS provides error correction guidelines for EPCRS

Correcting Participant Deferral Errors

One of the most common errors that occur in 401(k) plans is the improper implementation of elective deferrals. There are two types of failures that can happen when trying to correctly withhold and deposit deferrals. One is the failure to implement a traditional deferral election. The other is the failure to implement automatic enrollment. Another very common error is the improper exclusion of a participant. This is when a participant who is eligible for the Plan is improperly excluded from participating in the Plan. Figures 1-3 provide further guidance on correcting participant deferral errors.

Failure to Implement Deferral Elections:

The Internal Revenue Service (IRS) has specific correction methods stated in their Employee Plans Compliance Resolution System (EPCRS) for these types of errors. The corrective methods are detailed in the tables that follow. The standard correction under EPCRS for elective deferral failure is a QNEC equal to 50% of the elected deferral percentage and the applicable match using the Plan’s formula and the actual elected deferral percentage. This correction will be used if none of the below methods are applicable or completely followed. The IRS has issued additional correction methods which may reduce the cost of correction for elective deferral errors that are discovered and corrected quickly. The automatic enrollment correction is a subset of the traditional deferral election failure and if all standards described below are not met, the correction defaults to the traditional deferral election method.

Figure 1: Traditional Deferral Election Failure

Error Period Deferral Correction Match Correction 45-Day Notice Requirement?
Error does not exceed a total of 3 months. No QNEC necessary Follow the Plan’s match formula using the actual elected deferral percentage to calculate. Yes
Error occurred exceeding 3 months of failure and no more than 2 years following the end of the plan year in which the failure occurred. QNEC equal to 25% of the elected deferral percentage Follow the Plan’s match formula using the actual elected deferral percentage to calculate. Yes
Error occurring for longer than 2 years following the end of the plan year in which the failure occurred. QNEC equal to 50% of the elected deferral percentage* Follow the Plan’s match formula using the actual elected deferral percentage to calculate. No

*Standard Correction

Figure 2: Automatic Enrollment Failure (Including Auto-Escalation)

  Deferral Correction Match Correction 45-Day Notice Requirement?
Error does not extend beyond 9 ½ months following the end of the plan year in which the failure occurred. No QNEC necessary Follow the Plan’s match formula using the automatic deferral percentage to calculate. Yes
Error extends beyond 9 ½ months after the end of the plan year of failure, but not beyond 2 years following the end of the plan year in which the failure occurred. QNEC equal to 25% automatic enrollment deferral percentage Follow the Plan’s match formula using the automatic deferral percentage to calculate. Yes
Error occurring for longer than 2 years following the end of the plan year in which the failure occurred. QNEC equal to 50% automatic enrollment deferral percentage* Follow the Plan’s match formula using the automatic deferral percentage to calculate. No

*Standard Correction

Figure 3: Improper Exclusion of Participant

Error Period Deferral Match 45-Day Notice Requirement?
Error occurring within first 3 months of the plan year. No QNEC necessary Follow the Plan’s applicable match formula as indicated below. No
Error not exceeding 3 months and does not occur the first 3 months of the plan year. >No QNEC necessary Follow the Plan’s applicable match formula as indicated below. Yes
Error occurred exceeding 3 months of failure and no more than 2 years following the end of the plan year in which the failure occurred. QNEC equal to 25% applicable deferral percentage Follow the Plan’s applicable match formula as indicated below. Yes
Error occurring for longer than 2 years following the end of the plan year in which the failure occurred. QNEC equal to 50% applicable deferral percentage* Follow the Plan’s applicable match formula as indicated below. No
Plan Type Applicable Deferral Applicable Match  
Traditional 401(k) Plan The average ADP percentage of the applicable employment group (HCE or NHCE) Follow the Plan’s match formula using the average ADP percentage of the applicable employment group (HCE or NHCE).
Safe Harbor 401(k) Plan The greater of 3% of plan year compensation or the maximum deferral percentage necessary to obtain a matching contribution of 100% Follow the Plan’s safe harbor match formula.

*Standard Correction

45-Day Notice Requirement

All correction methods that require a 45-day notice are not considered corrected unless the notice is distributed to affected plan participants within the required time frame. If this requirement is not met, the reduced correction method cannot be used and the standard correction method applies.

The 45-day notice must include the following information:

  • General information relating to the failure, such as the percentage of eligible compensation that should have been deferred and the approximate date that the compensation should have begun to be deferred. The general information need not include a statement of the dollar amounts that should have been deferred.
  • A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly).
  • A statement that corrective allocations have been made (or that corrective allocations will be made). Information relating to the date and the amount of corrective allocations need not be provided.
  • An explanation that the affected participant may increase his or her deferral percentage to make up for the missed deferral opportunity, subject to applicable limits under § 402(g).
  • The name of the plan and plan contact information (including name, street address, email address, and telephone number of a plan contact).

Important Items to Note:

  • The timing of the corrections listed in the above charts assumes the error is discovered by someone other than the plan participant. If the participant discovers the error and notifies the plan sponsor, correct deferrals must begin by the last day of the month following the month the participant notifies the plan sponsor.
  • All corrective contributions must also include applicable earnings.
  • To use the reduced correction methods, the plan participant must still be employed.
  • If the Plan has a safe harbor matching feature, the match must be deposited as a QMAC instead of into the Safe Harbor Matching source.
  • EPCRS does not specifically state how to correct the failure to implement deferral changes; however, the IRS and DOL have consistently used these correction methods for the failure to implement deferral changes.

Author

Professional
Get In Touch With An Advisor
STAY INFORMED ON IMPORTANT TOPICS

Subscribe To Get CSH Guidance
Delivered To Your Inbox