Administering a 401k plan is not an easy task. We work in an electronic age in which it is very easy for a file to get uploaded incorrectly to a third party administer site or a deferral change file not be updated in payroll correctly. A little over a year ago, the IRS issued Revenue Procedure 2015-28 that provided for changes in certain correction methodologies for 401k and 403b plans. This revenue ruling is intended to supplement the existing procedures, not replace.
Provisions affected by the revenue ruling include the following for 401(k) and 403(b) retirement plans:
- Auto contributions and escalation errors
- Early correction of errors
In circumstances where errors occur related to auto contributions and escalation provisions, plan sponsors may not need to make corrective contributions for missed or incorrectly calculated employee elective deferrals if certain conditions are met.
No corrective contributions are required if correct deferrals begin by the first payment of compensation made on or after the earlier of:
- 9½ months after the end of the plan year in which the failure first occurred, or
- the last day of the month after the month the affected employee first notified the plan sponsor of the error.
In addition, the plan sponsor must issue a written notice to affected employees and provide corrective matching contributions, if applicable. Historically, plan sponsors would have had to make a contribution for the employee deferral’s missed, but this is now eliminated under the new provisions, provided conditions are met.
The IRS also is trying to encourage early correction of errors by lowering the cost to correct, you could pay less for employee deferral errors.
If the plan sponsor corrects the deferrals by the first payment of compensation made on or after the earlier of:
- three months after the failure first began for the affected employee, or
- the last day of the month after the month the affected eligible employee first notified the plan sponsor.
Corrective contributions would not be required for missed employee elective deferrals.
If the period of failure is greater than three months but correct deferrals begin by the first payment of compensation made on or after the earlier of:
- the last day of the second plan year after the plan year in which the failure first began for the affected employee, or
- the last day of the month after the month the affected eligible employee first notified the plan sponsor.
Then only 25% corrective contributions would be required for missed employee elective deferral failures.
These are just highlights of the revenue ruling relating to the employee deferral portion of the corrections. Other requirements must be met related to notices to participants, earnings calculation and match contributions. Your Meaden & Moore representative can help you with this.
