Guest Article Recent Rules for Elective Deferral Failures Reduce Consequences for Well-Meaning Plan SponsorsBy Buddy Horner, QKA, Senior Manager, Retirement Consulting with Bronfman E.L. Rothschild Revenue Procedure 2015-28 Presents Three New Methods for Correcting Elective Deferral Failures Industry research increasingly points to the positive benefits of both automatic enrollment and automatic escalation features in 401k plans1. Behavioral economists have demonstrated that implementing these programs result in higher participation rates and higher rates of participant deferrals2. Yet at the same time, some plan sponsors have hesitated because of perceived harsh consequences for the mistakes referred to officially as "elective deferral failures." An elective deferral failure happens when a plan sponsor fails to properly implement deferrals either that participants elect to make (affirmative elections) or those based on automatic features of the plans including automatic escalation. Last year, the IRS updated its Employee Plans Compliance Resolution System (EPCRS) and released Revenue Procedure 2015-283 to address these issues. We wanted to review this relatively new rule because of its timeliness as more and more plan sponsors consider automatic features. Correction Rules Were Previously Costly Prior to Revenue Procedure 2015-28, the rules to correct errors tended to overcompensate participants when these failures lasted over short periods. The cost to the plan sponsor of a missed deferral opportunity was generally 50% of the missed deferral. Costs varied based on the type of failure:
Corrections for automatic contributions arrangements were also extremely costly and discouraged plan sponsors from adopting these automatic contribution arrangements that make it easier for participants to save. New Methods Rev. Proc. 2015-28 offers three new methods to correct elective deferral failures:
Under all of these new corrective methods, the employer must also:
This guidance applies to errors that occur through December 31, 2020. For more detailed instructions, please contact your BELR representative. Sources: Internal Revenue Service, McKay Hochman Company, Inc. 1. https://www.ebri.org/publications/ib/?fa=ibDisp&content_id=4495
Bronfman E.L. Rothschild is a registered investment adviser. Securities, when offered, are offered through an affiliate, Bronfman E.L. Rothschild Capital, LLC (dba BELR Capital, LLC), Member FINRA/SIPC. Representatives may also be registered with Baker Tilly Capital, LLC, member FINRA/SIPC, an unaffiliated broker-dealer, in order to service various historical account relationships. © 2016 Bronfman E.L. Rothschild, LP ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. | ||||
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