Rev Proc 2015-28 - Affirmative Elections "in lieu of" Automatic Contribution

[dcoderre]

Rev Proc 2015-28 provides a "9-1/2 month rule" for Elective Deferral Failures associated with missed elective deferrals for eligible employees who are subject to automatic contribution features under a 401(k) or 403(b) -- including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly.

Question: Does the affirmative election "in lieu of" automatic contributions include only a participant's initial affirmative election opting out of auto-enrollment, or would it include the initial election and any subsequent affirmative election a participant makes if that participant is in the class of participants covered by the automatic enrollment feature?

Proposed Answer: It includes the initial affirmative election as well as any subsequent affirmative elections. This is true regardless of whether the plan contains an automatic escalation feature. (Assumes an EACA continues to cover participants who make an affirmative election -- i.e., annual notice continues to be provided to participants who make an affirmative election.)

Rationale: Consistent with the objective of encouraging automatic contribution features, nothing in the new rule specifically limits application to a participant's initial affirmative election. Section 4 of Rev Proc 2015-28 adds new section .05(8) of Rev. Proc. 2013-12 Appendix A that says in part: "If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution feature does not extend beyond the end of the 9-1/2 month period after the end of the plan year of the failure..." Further, a participant who makes an affirmative election is continued to be covered by an EACA (if the plan provides) so it does not make sense to limit the correction only to an initial election.

Example: Calendar year plan with auto-enrollment at 3%. Participant becomes eligible at 1/1/2015 and immediately opts out by affirmative election. Participant subsequently elects to defer 5% as of 7/1/2015, but the election is not implemented. The Participant does not notify the Employer, and the Employer implements the correction no later than the first payroll made on or after 10/15/2016. The Employer gives appropriate 45-day notice after deferrals begin and makes up the match with earnings within the "SCP correction window" for significant operational failures. No QNEC is required for the missed deferrals because the correction is appropriate under the "9-1/2 month rule" of Rev. Proc. 2015-28.

Agree? Disagree?

[John Feldt ERPA CPC QPA]

I agree. If they only wanted it to apply to initial affirmative elections, I think they would have to spell it out that way.

[Belgarath]

I was wondering about something on this Revenue Procedure. It seems odd to me that the rules are more favorable for ACA failures than non-ACA failures.

For example, in the ACA plan, a participant makes an affirmative election to defer 10% in 2015. As long as corrected by 9-1/2 months following 2015, and in accordance with the other requirements, no QNEC required.

Same situation, except a non-ACA plan. Now, you have the rolling 3-month period, and will have to do a QNEC of 25% for certain of the "missed deferrals" - which in this case would be 2.5%.

Any idea why the discrepancy? Ultimately the "why" doesn't matter - the rules are the rules, but I was just curious if anyone had any insights on this.

[dcoderre]

The background in Sec 2.03 gives a bit of a hint as a policy matter to encourage auto-enrollment.

The 3-month correction rule doesn't require a QNEC for missed deferrals. After three months, and before the end of SCP correction period for significant errors, the missed deferral QNEC is 25% assuming all the other requirements are met.

[Belgarath]

Thanks.

Yes, when I said it would be required for "certain" of the missed deferrals, I was referring only to those beyond the 3-month period. But I didn't make it very clear...

[John Feldt ERPA CPC QPA]

I think the IRS was hoping more plans would apply automatic enrollment features. The response was that a 50% QNEC for missing even a few deferrals seemed to onerous to bother trying for some employers.

In this Revenue Procedure, the IRS is basically saying, "Oh really? Well, then by lowering the QNEC for automatic enrollment plans, we should see more of them. So, let's lower it and see what happens over the next 5 years."

Revenue Procedure 2015-28, says this:

The safe harbor correction method under section 3.02(1) of this revenue procedure is available only for plans with respect to failures that begin on or before December 31, 2020. At a later date, the Service will consider whether to extend the safe harbor correction method for failures that begin in later years. In deciding whether to extend the safe harbor correction method, the Service will take into account, among other relevant factors, the extent to which there is an increase in the number of plans implemented with automatic contribution features.

[Francis]

An employer with an Automatic Enrollment 401k made missed automatically enrolling a newly hired employee who didn't fill out an enrollment form.

The employee was hired in January 2016, became eligible in April 2016, and the error was discovered in June 2016 when the employee was also finally enrolled. Are the below actions the needed steps to correct?

1. Employer adds "Missed Matching" to employee account.

2. Employer adds "Missed Earnings on Default Investment Option" to employee account.

3. Employer notifies employee of error and correction details within 45 days.

If the "Missed Earnings on Default Investment Option" need to be added, can anyone explain how to calculate the amount? Is the DOL calculator used?

Thank you very much for any information on the needed correction steps you can provide.