If you’ve seen our post, “Pension Plan Checklist: How to Find, Fix, and Avoid Mistakes”, you know that two of the most common errors made by sponsors in regard to retirement plans are:
- Not giving an eligible employee the opportunity to make elective contributions
- Failing to execute an employee’s salary deferral election.
That’s why the Treasury Department and the IRS have recently teamed up to issue some new guidelines for automatic enrollment and escalation (an automatic annual increase in contributions), making it easier for employers to correct unintended contribution errors in retirement plans without risking the plan’s tax qualification, and without having to obtain IRS approval. Outlined in Revenue Procedure 2015-28, these new methods provide safe correction methods for errors relating to automatic contribution features.
Under this new procedure, corrective qualified non-elective contributions are not required, as long as the error was detected and corrected within 9 1/2 months after the year of the failure. Treasury Department secretary, J. Mark Iwry states, “These simplified, safe harbor correction methods build on previous steps to encourage plan sponsors to adopt ‘next generation’ features and practices that help employees save for retirement.”
The decision to provide this guidance was due to many comments from sponsors, complaining that the high cost of correcting errors was preventing a wider adoption of plan features. With auto enrollment becoming increasingly popular, it’s important to understand the ramifications behind using the system, and the potential for increased errors. A recent study by Callan Investment Institute shows that around 61% of retirement plans offer auto enrollment to new hires, while only a third of plans offer both auto enrollment and escalation features. The safe harbor was officially effective April 2, 2015, and will sunset on December 31, 2020, although there is a chance it will be extended beyond that date if it leads to more use of auto enrollment.
Even with an experienced sponsor and recordkeeper in place, errors can occur, and the costs of those errors can add up. With new guidelines in place, it is expected that many errors be eliminated. For a detailed understanding, please look at Revenue Procedure 2015-28, or contact your pension professional. It is important to have a good understanding of how these changes apply to your retirement plan.
No information contained in this communication can be relied upon as legal or tax advice. It is not intended and cannot be used, relied or acted upon without professional guidance and advice.