Yet Another EPCRS Update: Automatic Enrollment

This article originally ran on May 21, 2015.

By Michael Webb

In the April 9th Market Beat, I wrote about the 403(b)/457(b) impacts of Revenue Procedure 2015-27, which made several updates to the Employee Plans Compliance Resolution System (EPCRS) found in Revenue Procedure 2013-12. EPCRS is the formal guidance that the IRS provides regarding correction of plan defects, and it is updated from time to time. 

Under this new revenue procedure, a limited safe harbor (unusually, effective only though 2020, though it may be extended) will permit employers the option of not making an additional employer contribution at all if:

• The defect is discovered within 9½ 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 failures in such plans are discovered during the required audit for the 5500).
• Corrected automatic deferrals commence no later than the earlier of the first paydate on or after the 9½-month period specified above or the first paydate of the month following the month in which the employee notifies the employer. Since it is rare that an employee actually notifies the employer, the 9½-month window will apply in most cases.
• Applicable notice is provided to the employee within 45 days after the commencement of the correct deferrals. 
• Missed matching contributions (and earnings) are contributions are made as if the error had not occurred, in accordance with the timing requirements under the self-correction program for significant operational failures, with one exception. Regarding calculation of earnings, which can often be difficult in the absence of an investment election by the employee (which 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. 

• If the missed deferrals do not occur for more than three months, no corrective employer contribution is required at all, provided that items 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 three 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, items 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.