The Internal Revenue Service recently published Revenue Procedures 2015-27 and 2015-28, which is welcome news for many employers seeking to increase participation in their retirement plans. Why? Because some of the best plan design features for increasing employee participation also increase the chance of errors in operations and administration. Correcting these errors can be expensive, and some employers avoid effective design features for this reason. The recently released Revenue Procedures reduce some fees, provide additional methods to make corrections, and also reduce the cost to make those corrections.
The Revenue Procedures improve the process for employers who discover their own errors and correct them using the IRS’s Employee Plans Compliance Resolution System (EPCRS) prior to receiving an audit notice from the IRS. The EPCRS, which the IRS offers for employer-sponsored retirement plans, provides employers with specific procedures they may follow to correct mistakes made in running their retirement plans. When one of these correction procedures is properly followed, the employer is able to avoid fines and penalties, and in some cases, prevent complete disqualification of the retirement plan.
Revenue Procedure 2015-27 reduces the fee an employer must pay the IRS to correct mistakes made administering loans to participants (a common problem). It also adds flexible, alternative methods to correct overpayments a plan makes to a participant. In some cases, plans that discover excess deferrals or contributions are able to return employee deferrals within 9 ½ months after the plan year end, rather than 2 ½ months. Before now, not returning excess for 9 ½ months could make the plan ineligible for the EPCRS self-correction option.
Revenue Procedure 2015-28 simplifies employer correction of two effective plan design features: automatic enrollment into the plan (sometimes referred to as “negative enrollment” or “default enrollment”), and automatic escalation of employee contribution amounts over time. Where a plan with these features improperly misses an employee’s deferral, it may accept an affirmative election to make up the contributions. Use of these design features typically raises employees’ participation in a 401(k) or 403(b) plan to the high 90th percentile. High participation is a strong sign of success for plan sponsors.
Finally, Revenue Procedure 2015-28 also offers a special safe harbor for plans that correct errors early on. Both Revenue Procedures authorize plan correction at a lower cost than any of the programs currently available to employer plan sponsors who want to correct errors they self-identify.
Employers who sponsor a retirement plan must have established practices and procedures designed to promote and facilitate compliance with the Internal Revenue Code. This is true even if they outsource plan administration and investments. It is always prudent to check your plan for potential errors and consider using one of these improved EPCRS programs to make full corrections and protect against future fines, penalties, and disqualification.