The Internal Revenue Service (IRS) has released two Revenue Procedures providing guidance under the Employee Plans Compliance Resolution System (EPCRS) that will facilitate the correction of certain retirement plan defects.

Rev. Proc. 2015-28, released on April 2, 2015, is effective immediately, while Rev. Proc. 2015-27, released on March 27, 2015, is effective as of July 1, 2015, although plan sponsors may choose to apply it immediately.

The most significant changes are highlighted below:

Rev. Proc. 2015-28

Correcting Elective Deferral Failures Under Automatic Contribution Features

Under current EPCRS procedures, correction of a failure to correctly implement elective deferrals under an automatic enrollment and/or escalation feature (including an employee’s affirmative election), generally requires that the plan sponsor make a qualified nonelective contribution (QNEC) equal to half of the missed deferrals plus earnings. Under Rev. Proc. 2015-28, a QNEC is not required as long as the correct deferrals begin no later than the earlier of:

• The first payroll made on or after the last day of the 9-1/2 month period following the plan year in which the failure first occurred (e.g., October 15th for calendar year plans); or

• If the participant notifies the plan sponsor of the failure, the first payroll made on or after the last day of the month following the month of such notification.

For this relief to apply, the plan sponsor must provide a notice to the affected participant(s) no later than 45 days after the date the correct deferrals begin.

A corrective contribution for missed matching contributions is still required, and must be made by the latest date for self-correcting significant failures under EPCRS. If the participant has not made an affirmative investment election, earnings allocable to the missed match may be based on the rate of return for the plan’s default investment alternative.

Early Correction of Elective Deferral Failures

Rev. Proc. 2015-28 also provides that no QNEC is required where there is a failure to correctly implement a deferral election (or an election change) if the correct deferrals begin no later than the earlier of:

• The first payroll made on or after the three-month period that begins when the failure first occurred, or,

• If the participant notifies the plan sponsor of the failure, the first payroll made on or after the last day of the month following the month of such notice.

If the failure is corrected after the three-month period ends, but before the latest date for self-correcting significant failures under EPCRS, a QNEC equal to 25 percent of the missed deferral plus earnings is required.

As with elective deferral failures under automatic contribution features, the plan sponsor must provide a notice to the affected participant(s) no later than 45 days after the date the correct deferrals begin. Also, a corrective contribution for missed matching contributions is still required, and, if the participant has not made an affirmative investment election, earnings allocable to the missed match may be based on the rate of return for the plan’s default investment alternative.

Rev. Proc. 2015-27

Participant Repayment of Overpayments

Until now, the EPCRS process for correcting a retirement plan overpayment – for example, an impermissible withdrawal or a miscalculated benefit – was for the plan sponsor to take “reasonable steps” to have the participant or beneficiary return the overpayment plus earnings to the plan. If some or all of the overpayment was not returned, the employer (or another person) was generally required to make a corrective contribution to the plan in an amount equal to what was not returned (a “make-whole” contribution).

Recognizing that participants and beneficiaries may be unable to repay these overpayments, Rev. Proc. 2015-27 states that, depending on the facts and circumstances of the failure, requesting such repayment may not be required. In those cases, other appropriate correction methods may be employed, such as a make-whole contribution by the employer (or another person) or a retroactive amendment to conform to the plan’s operation. In this respect, the IRS is requesting comments on appropriate correction methods.

Reduced Compliance Fees for Minimum Required Distribution and Loan Failures.

The compliance fee for correcting minimum required distribution (MRD) failures under the EPCRS Voluntary Correction Program (VCP) is based upon the number of MRD failures. Rev. Proc. 2015-27 increases the number of such failures that can be corrected for a $500 compliance fee from 50 to 150, and provides for a $1,500 compliance fee for MRD failures that range from 151 to 300 failures.

Rev. Proc. 2015-27 also reduces the compliance fee for correction of plan loans that fail to satisfy the Internal Revenue Code requirements – for example, loan defaults that were not timely reported as taxable events. If the VCP submission only relates to the loan failure and does not affect more than 25% of the participants for any plan year in which the failure occurred, the compliance fee is $300 to correct 13 or fewer failures, stair-stepping up at intervals to $3,000 where there are more than 150 such failures. This is significantly less than the current compliance fee range of $15,000 - $25,000 for large plans.

These are positive changes that should encourage plan sponsors to utilize the EPCRS procedures. Plan sponsors should evaluate their current administrative practices and assess whether modifications are needed in order to take advantage of these new procedures.