The IRS has recently issued three new, less expensive safe harbor procedures for correcting missed elective deferrals. These new procedures require either no employer corrective contribution to make up the missed elective deferrals, or only a 25% contribution, depending upon how soon detection of errors and correction occurs.
The new procedures are intended to address the "windfall" that employees receive when they collect their full pay and also receive the current 50% make-up corrective contribution, and to encourage plan sponsors to adopt automatic contribution and escalation arrangements.
No employer corrective contribution to make up for missed elective deferrals is required if correct deferral amounts begin to be deducted from future paychecks by the first paycheck on or after:
A 25% employer corrective contribution (adjusted for earnings) to make up for missed elective deferrals is required if:
Match make-up deadline: no matter which of these three new correction procedures are used, 100% of the missed matching contributions (adjusted for earnings) still must be contributed by the employer. The deadline for the matching contribution make-up is the same for all three new procedures: the last day of the second plan year following the Plan year in which the error first occurred.
Notice requirement: all three procedures require that a special notice be provided to affected participants by the 45th day after the date on which prospective correct deferrals begin. The notice generally must describe the error and the correction, including the date the error began and the percentage of compensation that should have been deferred, and inform the participant that he/she may increase his/her future deferral percentage in order to make up for the missed deferrals within the annual deferral limit. Specific dollar amounts do not have to be provided.
Earnings: If the participant has not made an investment election, earnings can be calculated on the basis of either
In order to take advantage of the new procedures, early detection is key. Plan administrators may wish to consider developing procedures to detect and correct missed deferrals on a semi-annual basis – or, if the three-month correction method is desired, even more frequently.