We all know that nobody is perfect. The good news is, so does the IRS. The IRS acknowledges that retirement plan administrators are not infallible, and provides correction for certain administrative errors. The IRS also recently reduced certain penalties and extended deadlines for fixing specified mistakes.
Excess Contribution Distributions
Previously, plans that failed their Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) discrimination tests had to refund all excess contributions and related earnings to the participants by the first 2 ½ months of the following year. If this corrective action was not done within this time period, the plan would be subject to excise tax.
The IRS has now granted plans some leeway on this time frame. For defined contribution (DC) plans featuring only elective deferrals and non-elective employer contributions the IRS extended this deadline to nine months. What is a DC plan only featuring elective deferrals and non-elective employer contributions? These would be plans that allow employee deferral, employer discretionary profit-sharing contributions and/or a 3% safe harbor matching contribution to anyone who is eligible to participate in the plan. (Note: It does not matter if the participant makes employee deferrals into the plan). If the plan has any employer matching contributions or follows the 4% safe harbor rule, this nine-month time frame is not applicable to the DC plan.
Missed Elective Deferrals
Another change the IRS implemented recently pertains to penalties associated with a plan’s failure to start deducting and investing 401(k) plan participants’ elective deferral amounts and any accompanying employer matches. Previously, plans had to contribute 50% of any employee elective deferrals and 100% of any employer matching deferrals plus lost earnings for any missed deferrals.
IRS Revenue Procedure 2015-28 has reduced the amount of corrective contributions that may have to be made if certain rules are met:
0% employee elective deferral contribution; 100% employer matching contribution plus lost earnings:
- The mistake must begin to be corrected within three months from the date the failure first occurred or, if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification.
- A notice must be sent to all affected participants that include:
- 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. You do not have to include dollar amounts.
- Disclosure that the appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that contributions will begin shortly).
- Disclosure that the corrective contributions have been made (or will be made shortly). You do not have to disclose the date of correction or amount of the correction.
- An explanation that the participant can increase his or her deferral percentage to make up for the lost deferral opportunity, subject to applicable limits under section 402(g).
- The name of the plan and contact information (address, phone number, email, number of plan contract).
25% employee elective deferral contribution; 100% employer matching contribution plus lost earnings (on both contributions):
- The mistake must begin to be corrected by the first payment of compensation made on or after the last day of the second plan year following the plan year in which the failure occurred, or if the plan sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification.
- A notice must be sent to all affected participants that include the bullet points previously explained.
If the pervious rules are not met, the corrective contribution amounts revert back to the old rules of 50% of any employee elective deferrals and 100% of any employer matching deferrals plus lost earnings for any missed deferrals.
While corrective actions can still be arduous and time consuming, the IRS has relaxed some of its rules to try help plan administrators. It is important to ensure that you meet the requirements for each new rule.
If you have any questions or need help determining the corrective action that should be taken, contact Jim Pellino at firstname.lastname@example.org, or call him at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Group.