IRS Makes Prompt Correction of Elective Deferral Errors Less Expensive

As anyone who deals with the administration of qualified retirement plans knows, mistakes happen.  This is a fact that the IRS is well aware of, and the last thing that the Service wants to do is harm participants by disqualifying their company’s retirement plan.  For this reason, the IRS has established the Employee Plans Compliance Resolution System (“EPCRS”).  This system allows plan administrators to make voluntary corrections without risking disqualification of their plan.

The EPCRS has three methods for correcting errors depending on the timing and severity of the error.

  1. Audit Closing Agreement Program (“Audit CAP”) —this method allows a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.
  2. Voluntary Correction Program (“VCP”) —this method allows a plan sponsor to pay a fee and receive a stamp of approval from the IRS any time before audit.
  3. Self-Correction Program (“SCP”) —this method only applies to certain errors, and allows a plan sponsor to correct plan failures without paying a fee or getting the IRS involved.

Recently, the IRS published Revenue Procedure 2015-281, which created a new, more cost effective self-correction method for elective deferral errors.  Enrollment errors are one of the most common Plan Sponsor mistakes.  Examples of these mistakes are:

  • missing a participant’s enrollment date
  • withholding the wrong percentage from a participant’s paycheck
  • or using the wrong definition of compensation for deferral withholding purposes.

The previous correction method for these types of errors was for the plan sponsor to make a contribution to each affected participant’s account equal to 50% of the missed deferral opportunity plus any missed employer matching contribution plus earnings.  The new method eliminates or reduces the required contribution for the missed deferral opportunity when the error is caught and corrected quickly.

Rolling Three Month Correction Period For Plans with Automatic Enrollment or Escalation Plans without Auto-Enrollment
No missed deferral contribution is required to be made if: No missed deferral contribution is required to be made if: The correction contribution of 50% of the missed deferral opportunity is reduced to 25% if:
1) the error is corrected by the first payroll following the three month period beginning on the date the error first occurred (or if the affected employee notified the employer of the error, the first payroll following the one month period beginning on the date that the employer was notified), 1) the error is corrected within 9 ½ months following the end of the plan year in which the error occurred (or if the affected employee notified the employer of the error, the first payroll following the one month period beginning on the date that the employer was notified), 1) the correction is made by the first payroll after the end of the 2nd plan year following the plan year in which the error occurred (or if the affected employee notified the employer of the error, the first payroll period following the one month period beginning on the date that the employer was notified),
2) the employee is given notice within 45 days following the correction, and 2) the employee is given notice within 45 days following the correction, and 2) the employee is given notice within 45 days following the correction, and
3) the full missed employer match is made plus earnings. 3) the full missed employer match is made plus earnings. 3) the full missed employer match is made plus earnings.

If an elective deferral error is not caught and corrected within the timeframes discussed above, the correction method falls back to the old method2 – which requires a contribution of 50% of the missed deferral opportunity plus any missed employer matching contribution plus earnings.

If you think you may have a plan error that needs to be corrected, or you have questions about the IRS Employee Plans Compliance Resolution System, contact our ERISA Service Team  today at or call 800.234.9584.

Originally published 06/30/15.
1 Rev. Proc. 2015-28, 2015-16 I.R.B. 914
2 Rev. Proc. 2013-12, 2013-4 I.R.B. 313