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IRS MODIFIES RULES ON ELECTIVE DEFERRAL to 401(K) FAILURES – IMPORTANT CHANGES FOR EMPLOYERS

8.6.15

IRS MODIFIES RULES ON ELECTIVE DEFERRAL to 401(K) FAILURES – IMPORTANT CHANGES FOR EMPLOYERS

Revenue Procedure 2015-28 (issued April 2, 2015) modifies the existing rules with respect to 401(k) plans with automatic contribution features and 401(k) plans that have elective deferral failures of a limited duration. Under the old rules, the employer was required to make a corrective contribution of 50% of the missed deferral.  This applied to both the improper exclusion of an eligible employee and failures to implement employee elections.

Under Rev. Proc. 2015-28 the rules are now:

Elective Deferral to 401k Failures Related to Automatic Contribution Features

Where a failure to implement an automatic contribution feature or an affirmative election of an eligible employee does not extend beyond the end of the 9½-month period after the end of the plan year of the failure, no corrective contribution is required. This deadline is meant to correspond with the Form 5500 filing deadline.

In order to be eligible for such relief, the following conditions have to be satisfied:

1. Correct deferrals begin on the earlier of the first payment of compensation made on or after the last day of the 9½-month period after the end of the plan year in which the failure first occurred or the first payment of compensation made on or after the last day of the month after the month of notification by the affected eligible employee;

2. Notice is given to the affected eligible employee no later than 45 days after the date on which correct deferrals begin; and

3. Corrective contributions are made for any missed matching contributions and adjusted for earnings.

Employers sponsoring 401(k) plans with automatic contribution features no longer need to make the 50% corrective contribution with respect to elective deferrals that were not properly made. The only necessary corrective contribution relates to the matching contributions that would have been made.

The IRS has modified rules on elective deferral to 401k.

Elective deferrals failures that do not exceed three months

In order to encourage the early correction of elective deferral failures, a new safe harbor has been established for elective deferral failures that do not exceed three months. Under this new safe harbor, no corrective contribution for the missed elective deferrals is required, provided the following conditions are satisfied:

1. Correct deferrals begin on the earlier of the first payment of compensation made on or after the three-month period or the first payment of compensation made on or after the last day of the month after the month of notification by the affected eligible employee;

2. Notice is given to the affected eligible employee no later than 45 days after the date on which correct deferrals begin; and

3. Corrective contributions are made for any missed matching contributions and adjusted for earnings.

Elective deferral failures that extend beyond three months

Where elective deferral failures extend beyond three months, but do not extend beyond the end of the second plan year after the failures occurred, a safe harbor correction method is established that permits the employer to make a corrective contribution equal to 25% of the missed deferrals.

In order to utilize this safe harbor, the employer has to satisfy the following conditions:

1. Correct deferrals begin on the earlier of 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 the first payment of compensation made on or after the last day of the month after the month of notification by the affected eligible employee;

2. Notice is given to the affected eligible employee no later than 45 days after the date on which correct deferrals begin; and

3. Corrective contributions (including the 25% corrective contribution and any missed matching contributions) are made and adjusted for earnings.

Notice requirement

The notice required under the safe harbor correction methods outlined above must include the following information:

1. General information relating to the failure, such as the percentage of eligible compensation that should have been deferred;

2. A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or will begin shortly);

3. A statement that corrective contributions relating to missed matching contributions have been made (or will be made);

4. An explanation that the affected participant may increase his or her deferral percentage in order to make up for the missed deferral opportunity; and

5. The name of the plan and contact information.