Corrections of Elective Deferral Failures in Automatic Contribution Arrangements

In order to encourage employers to use plan designs that include automatic contribution features (such as auto enrollment and auto escalation of elective deferrals), the IRS allows special “safe harbor” correction methods for plans that experience elective deferral failures related to these types of features(and for other types of de minimis elective deferral contribution failures that meet the requirements described below). If a plan does not qualify for one of these special rules, the safe harbor correction for missed elective deferrals is for the employer to contribute 50% of the “missed deferral opportunity” plus 100% of any missed match and any lost earnings on such amounts. See Revenue Procedure 2016-51and new Revenue Procedure 2018-52.


Brief Exclusions. No corrective contributions for missed elective deferrals are required for a “brief exclusion” (which may be a rolling three-month period anytime during the plan year), although corrective contributions must be made to makeup for any missed matching contributions (plus earnings, if applicable)by the end of the second plan year following the plan year of the failure. However, to use this method, correct deferrals must begin no later than the earlier of:(1) the first payment of compensation made on or after the three-month period that begins when the failure first occurred or (2) the first payment of compensation made on or after the last day of the month after the month of notification if notified by an affected employee.A notice must be provided to the affected employee under this safe harbor method.


25% Contribution. For failures that exceed the three-month period,but do not extend beyond the end of the second plan year following the year of the failure, the employer corrective contribution is 25%of the missed deferral opportunity, plus corrective matching contributions (plus earnings) that would have been allocated under the terms of the plan.The corrective contribution must be made by the end of the second plan year following the plan year of the failure.The plan sponsor must satisfy certain conditions in order to use this more favorable safe harbor method which include: (1) providing affected employees with the opportunity to make elective deferrals no later than the earlier of (a) the last day of the second plan year following the plan year of the failure,or (b)the first payroll date on or after the last day of the month after the month of notification if notified by an affected employee, and (2) providing the required notice to an affected employee.


Automatic Contributions. The last safe harbor correction method—which only applies to plans with automatic contribution arrangements—may also require no corrective contributions for the elective deferral failures, although again,corrective contributions must be made to makeup for any missed matching contributions (plus earnings, if applicable)by the end of the second plan year following the plan year of the failure. To qualify for this special method, correct deferrals must begin by the earlier of (1) nine and one-half months after the plan year of the failure or (2) the last day of the month after the month of notification if notified by an affected employee. As with the other safe harbor correction methods, there is a notice that must be provided to the affected employee.


Please feel free to contact our Firm if you would like to discuss any of the foregoing information in greater detail. We would welcome the opportunity to consult with you.


© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of October 31, 2018.



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