New Safe Harbor for Automatic Enrollment or Escalation
Other Correction Options for Missed Deferrals
The Revenue Procedure also provides two additional correction options that apply to all failures involving missed deferrals – regardless of whether the failure involves an automatic enrollment or escalation feature. One such option applies if a failure is detected relatively rapidly, while the other applies more broadly.
Existing Correction Rules. Prior to this Revenue Procedure, an employer that was lucky enough to detect a failure to honor an employee’s deferral election within the first three months of a plan year could avoid having to correct those missed deferrals – assuming the employee had the ability, over the remainder of the plan year, to make the full annual deferral and receive the full annual match. However, this exception to the corrective contribution requirement did not apply if the failure was detected during the last nine months of a plan year – even if the failure had lasted for less than three months.
Apart from that narrow three-month exception, an employer that had failed to honor a deferral election was required to make a special corrective contribution equal to 50% of the deferrals that would have been made on an employee’s behalf had the employee’s election been honored. (This contribution was set at only 50% of the missed deferrals because the employee actually received – on a taxable basis – the amount that should have been deducted from his or her pay.)
Rolling Three-Month Exception. The Revenue Procedure converts the existing three-month exception into a rolling three-month provision. So long as elective deferrals commence within three months of when they should have commenced – regardless of where that falls during a plan year – an employer need not make up the missed deferrals. (If the affected employee notifies the employer sooner, the deferrals must commence by the last day of the month following the month in which the employer receives this notice.)
This expanded three-month exception does nothing to shield an employer from having to make up any matching contributions that an employee would have received if the missed deferrals had actually been made. Such a corrective match, as adjusted for lost earnings, must be made by the SCP Deadline. And affected employees must be notified of the failure and its correction within the 45-day period described above.
Failures Lasting More than Three Months. The other new correction method applies to operational failure lasting more than three months – but only if an employer begins deducting the proper elective deferrals from an employee’s pay by the SCP Deadline. In this case, the employer does not get a “free pass” on the missed deferrals. However, instead of contributing 50% of those missed deferrals, the corrective contribution need only be 25% of that amount.
The employer must also make the full amount of any matching contributions. Those contributions, along with the corrective contribution equal to 25% of the missed deferrals, must be adjusted for lost earnings. All of these contributions must be made by the SCP Deadline. And the affected employees must also receive the 45-day notice.
Sunset Provision; Effective Date