IRS Revises EPCRS Guidance for Employee Elective Deferral Failures

The IRS has issued revisions to the Employee Plans Compliance Resolution System (“ECPRS”) in Revenue Procedure 2015-28, modifying Revenue Procedure 2013-12

ECPRS is a program that allows for correction of plan failures.  As the IRS outlines in the introduction to the program found in Rev. Proc. 2013-12, it is meant to allow retirement plans that are intended to comply with §§401(a), 403(a), 403(b), 408(k) or 408(p) but which have failed to meet the requirements of those provision to correct the errors that will allow the plans to continue to offer tax-favored benefits.

The IRC itself provides that a plan must comply with the various provisions applicable to each of those plans in order to maintain “qualified” status—thus, a failure to meet all of the requirements would make the plan no longer qualified.  Such treatment would negatively impact both the sponsor (whose deductions would often be delayed or disallowed) and the participations (who would lose tax deferral on the contributions and current earnings). 

The draconian nature of that sanction has lead to the creation of ECPRS to allow plans to come forward to get their errors corrected without risking disqualification.  Generally for the various issues covered by ECPRS the program specifies corrective action that must be taken (often requiring the plan sponsor to make contributions to the accounts of negatively impacted employees), as well as fees or monetary sanctions that will apply.

Generally the program rewards uncovering plan errors early and taking voluntary action rather than waiting for the IRS to arrive on the scene.  The program has three levels triggered by when the sponsor enters the program, as well as the nature of the error.

Rev. Proc. 2013-12 described these levels as noted below:

  • Self-correction (SCP). A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan. For a SEP or SIMPLE IRA Plan, however, SCP is available only if the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the Service. In the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or in the case of a 403(b) Plan, the Plan Sponsor generally may correct even significant Operational Failures without payment of any fee or sanction if the correction is made within the time specified in section 9.02.
  • Voluntary correction with Service approval (VCP). A Plan Sponsor, at any time before audit, may pay a limited fee and receive the Service's approval for correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan failure. Under VCP, there are special procedures for Anonymous Submissions and group submissions.
  • Correction on audit (Audit CAP). If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.

The changes in Revenue Procedure 2015-28 are relatively minor and primarily affect two areas.

The revenue procedure responds to comments the IRS has received that the ruling summarizes as follows:

Commenters have stated that the cost associated with correcting failures to implement automatic contribution features under the current rules in EPCRS, as set forth in Rev. Proc. 2013-12, discourages employers from adopting plans with automatic contribution features because implementation errors are more common for plans with automatic contribution features (particularly automatic escalation features).  The commenters also noted that implementation errors typically are discovered in connection with the preparation of a plan’s Form 5500series return/report for a plan year.  In addition, commenters expressed the view that current EPCRS safe harbor 2correction methods for the exclusion of eligible employees in a § 401(k) plan or §403(b) Plan, or for failing to implement a salary reduction election in a §401(k) plan or §403(b) Plan, create a “windfall” for affected employees because those employees receive both their full salary and a 50% make-up corrective contribution.  Commenters argue that this correction overcompensates affected participants for failures that last a short period of time because the participants usually have the opportunity to increase elective deferrals in later periods. 

The ruling contains special safe harbor methods to correct failures related to automatic contribution features in §401(k) or §403(b) plans.  If the error does not extend beyond 9 ½ months after the end of the plan year in which the failure begins, there may be no need to make a qualified nonelective contribution (QNEC) for the missed deferrals if all of the following conditions are met:

  • Correct deferrals begin by the earlier of
  • The first compensation payment made to an affected employee made on or after last day of the 9 ½ month period or
  • The first compensation payment made to an employee on or after the last day of the month in which the employee informs the sponsor of the error
  • Notice in accordance with the requirements in the ruling are given to affected employees within 45 days after the date on which correct deferrals begin and
  • Corrective contributions to make up for lost matching contributions are made within the time period specified in the Self-Correction Program (SCP) for significant operational failures and are adjusted for earnings.  Earnings may be computed using the plan’s default investment alternative, but any cumulative losses over the period may not be used to reduce the correction payment

The 9 ½ month period was picked to coincide with the due date of the Form 5500 for the plan, since commentators had pointed out that such errors are often surfaced during the preparation of the 5500 for the year following the year of failure.

This correction will sunset for plan years that begin after December 31, 2020 unless the IRS decides to extend the safe harbor.  Specifically the IRS is interested in seeing whether the availability of this “easy fix” for operational errors in the year of implementation of an automatic contribution feature causes more plans to offer such a feature, as commentators had indicated the cost of correcting errors discouraged plan sponsors from adding such a provision to their plans.

The IRS is also implementing a staggered set of correction options based on the time period of the error to encourage early correction.  Under this modification to the prior ruling, the following provisions will apply:

  • If the correction period for Employee Elective Deferral Failures for an employee does not exceed three months, no QNEC is required for the missed deferrals if:
  • Correct deferrals begin not later than the earlier of
  • The first compensation payment on or after the end of the three month period or
  • The first compensation payment made to an employee on or after the last day of the month in which the employee informs the sponsor of the error
  • Notice is given to affected employee within 45 days after the date on which correct deferrals begin and
  • Corrective contributions of earnings for missed deferrals, as described above for 9 ½ month safe harbor, are made to the account of the affected employee
  • If the correct period exceeds three months but does exceed the SCP correction period for significant failures then an employer may correct the error by making a QNEC equal to 25% of the missed deferrals in lieu of the higher QNEC (50%) required under the regular rule.  To use this condition the sponsor must:
  • Begin correct deferrals not later than the earlier of
  • The first compensation payment on or after the end of the second plan year following the year in which the failure occurred or
  • The first compensation payment made to an employee on or after the last day of the month in which the employee informs the sponsor of the error
  • Notice is given with 45 days of the beginning of correct deferrals to the affected employee and
  • Corrective contributions, including the 25% QNEC and employer contributions to make up for any missing matching contributions) and earnings adjustments are made under the timing requirements under SCP for significant operations failures.

Details of these corrections are found in this ruling, beginning in Section 4 of the ruling.  The ruling was effective April 2, 2015.