Another EPCRS Update: Automatic Enrollment
Earlier this year, we covered the impact on 403(b)/457(b) plans of Revenue Procedure 2015-27, which made several updates to the Employee Plans Compliance Resolution System, or EPCRS, found in Revenue Procedure 2013-12. EPCRS is the formal guidance the IRS provides to correct plan defects, and occasionally, it is updated. Shortly after the first update, the IRS released a secondary update, Revenue Procedure 2015-28, outlining even more changes to EPCRS; specifically in the area of automatic contribution arrangements, more commonly referred to as auto-enrollment and auto-escalation. Perhaps the IRS wanted to highlight these particular auto-enrollment changes, or perhaps they neglected to include these changes in the previous revenue procedure. In this article, we will examine the auto-enrollment changes to EPCRS to determine their impact on 403(b)/457(b) plan sponsors.
Auto-enrollment features are relatively rare in the non-ERISA 403(b) marketplace, due to a variety of compliance issues. They are only marginally more common among ERISA 403(b) plans. Automatic enrollment is limited in 457(b) plans, as only governmental plans may permit it (private tax-exempt plans may not utilize this feature, and even if they could, these plans would not be eligible to correct defects under EPCRS). Thus, any regulatory changes to auto-enrollment will have a limited impact on 403(b) and 457(b) plans. However, with auto-enrollment on the rise, the impact of the EPCRS changes may be greater in the future, and forward-thinking plan sponsors may wish to become scholars of auto-enrollment provisions.
The current EPCRS program corrects failures to auto-enroll employees by providing an employer contribution that is equivalent to 50% of the amount of the missed deferral. One can certainly understand an employee’s desire to elect such a “deal,” as not only would an employee receive their full salary, without the automatic deferral taken out, but they would also receive an additional employer contribution! Understandably, for plan sponsors, the correction is not a desirable situation. This has been one of the more unpopular provisions of EPCRS, and the IRS has received several comments requesting a change.
Under the new revenue procedure, a limited safe harbor (effective only though 2020, though it may be extended) will permit employers the option of not making an additional employer contribution, if:
- Part 1: The defect is discovered within 9 ½ months in the year following the plan year of the failure (not coincidentally, this is the extended 5500 filing deadline for ERISA plans, since most plan failures are discovered during the required 5500 audit).
- Part 2: Corrected automatic deferrals commence no later than the EARLIER of a) the first paydate on or after the 9 ½ -month period specified above or b) the first paydate of the month following the month in which the employee notifies the employer. Since employees rarely notify the employer, the 9 ½-month window will apply in most cases.
- Part 3: Applicable notice is provided to the employee within 45 days after the commencement of the correct deferral.
- Part 4: Missed matching contributions (and earnings) are made as if the error had not occurred, in accordance with the timing requirements under the Self-Correction Program (SCP) for significant operational failures, with one exception: with respect to calculation of earnings (which can often be difficult in the absence of an investment election by the employee, as is often the case), the default investment alternative return can be used; provided that if the return results in a loss, zero earnings are calculated rather than a reduction in the amount of the missed contribution for loss.
In addition, in an attempt to further relieve the administrative burden of correcting missed automatic deferrals, as well as missed deferrals that were actually elected by the employee (e.g., in a non auto-enrollment situation), some additional safe harbor corrective procedures were added, as follows:
- If the missed deferrals do not occur for more than three months, no corrective employer contribution is required at all, provided that parts 3 and 4 above are also implemented, and that the employee did not notify the employer during months 1-2 of the 3-month period (a rare occurrence), in which case the correct deferrals must commence no later than the first paydate of the month following the month of notification.
- If the missed deferrals occur for more than 3 months, but less than the self-correction period of significant operational failures (generally, within two plan years following the year in which the failure occurred), an employer contribution is required, though instead of 50% of the missed deferral amount under the existing EPCRS, the amount is 25%. Again parts 3 and 4 above must also be implemented, and the defect must be corrected earlier in the unlikely event that the employee notifies the employer earlier.
The elimination and/or reduction of an employer contribution to correct most auto-enrollment failures, as well as certain elective deferral failures, is welcome news for all retirement plan sponsors. However, the changes will have a limited impact on the 403(b) and governmental 457(b) market, since auto-enrollment is not yet a popular feature. Of greater importance to these plan sponsors is the relaxation of the corrective procedures for missed elective deferrals in situations that do not involve auto-enrollment.
*Note: A version of this article previously appeared in the National Tax-Deferred Savings Association’s NTSA.net publication
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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