IRS Revenue Procedure 2015-28 Adds New Safe Harbor Correction Methods to EPCRS

Practical Law Legal Update 5-607-7910 (Approx. 6 pages)

IRS Revenue Procedure 2015-28 Adds New Safe Harbor Correction Methods to EPCRS

by Practical Law Employee Benefits & Executive Compensation

Background on EPCRS

Qualified retirement plans provide several tax advantages to both the plan sponsor and plan participants. However, to enjoy these tax advantages, plan sponsors must comply with plan document and operational compliance requirements set out in the Code. The complexity of these compliance requirements leads to frequent errors which, if left uncorrected, can jeopardize a plan's tax-qualified status. As a result, the IRS created EPCRS to help plan sponsors correct errors.

EPCRS encourages voluntary compliance by allowing self-correction in certain situations and by providing plan sponsors an opportunity to voluntarily seek IRS approval of corrections at reduced costs and fees. For more information, see:

Revenue Procedure 2015-28 Safe Harbor Correction Methods

Revenue Procedure 2015-28 creates safe harbor correction methods that apply to employee elective deferral failures (EEDF), a new term, which are failures to correctly implement elective deferrals in a Code Section 401(k) plan or 403(b) plan.

Correction Methods for Failures Related to Automatic Contribution Features

Revenue Procedure 2015-28 provides an alternative correction method for EEDFs associated with missed elective deferrals for employees subject to automatic contributions under a Code Section 401(k) plan or 403(b) plan (including employees who made affirmative elections in lieu of automatic contributions). Under the new safe harbor, if the failure does not extend beyond a period of 9 ½ months after the end of the plan year in which the failure occurred, the employer is not required to provide qualified nonelective contributions (QNECs) (as defined in Treas. Regs. §1.401(k)-6) for the missed elective deferrals if:

Timing of correct deferrals. Correct deferrals begin no later than the earlier of the first payment of compensation made:
- on or after the last day of the applicable 9 ½ month period; or
- if the plan sponsor had notice of the failure, on or after the last day of the month after the month of notification.
Sufficient notice. Notice of the failure, satisfying the requirements in the modified Appendix A of Revenue Procedure 2013-12, is given to the employee no later than 45 days after the date on which correct deferrals begin.
Corrective contributions. Corrective contributions, adjusted for earnings, are made within the time requirements under the Self-Correction Program (SCP) for significant operational failures (see Practice Note, Correcting Qualified Plan Errors under EPCRS: Self-correction Program (SCP)). The revenue procedure also includes a new alternative safe harbor for the calculation of earnings.

This safe harbor is available to plans for failures that begin on or before December 31, 2020.

Correction Methods to Encourage Early Correction

Revenue Procedure 2015-28 also provides safe harbor correction methods to encourage the early correction of EEDFs. Which safe harbor may be used depends on the length of the failure.

Failures That do Not Exceed Three Months

This safe harbor creates a rolling correction period for failures that do not exceed three months. Under this safe harbor, QNECs for missed elective deferrals are not required if:

Timing of correct deferrals. Correct deferrals begin no later than the earlier of the first payment of compensation made:
- on or after a period of three months after the first failure occurred; or
- if the plan sponsor had notice of the failure, on or after the last day of the month after the month of notification.
Sufficient notice. Notice of the failure, satisfying the requirements in the modified Appendix A of Revenue Procedure 2013-12, is given to the employee no later than 45 days after the date on which correct deferrals begin.
Corrective contributions. Corrective contributions, adjusted for earnings, are made within the time requirements under SCP for significant operational failures (see Practice Note, Correcting Qualified Plan Errors under EPCRS: Self-correction Program (SCP)).

Failures That Exceed Three Months

This safe harbor applies if the period of failure exceeds three months but does not exceed the SCP correction period for significant failures. Under this safe harbor, a plan sponsor may make a corrective contribution equal to 25% of the QNEC, in lieu of the higher payment required under Revenue Procedure 2013-12, if:

Timing of correct deferrals. Correct deferrals begin no later than 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
- if the plan sponsor had notice of the failure, on or after the last day of the month after the month of notification.
Sufficient notice. Notice of the failure, satisfying the requirements in the modified Appendix A of Revenue Procedure 2013-12, is given to the employee no later than 45 days after the date on which correct deferrals begin.
Corrective contributions. Corrective contributions, adjusted for earnings, are made within the time requirements of SCP for significant operational failures (see Practice Note, Correcting Qualified Plan Errors under EPCRS: Self-correction Program (SCP)).

Practical Implications

Revenue Procedure 2015-28 provides important new safe harbor correction methods that allow plan sponsors flexibility when correcting EEDFs and may reduce costs associated with correcting plan operational and administrative failures.

IRS Revenue Procedure 2015-28 Adds New Safe Harbor Correction Methods to EPCRS | Practical Law