EPCRS Missed Deferral Opportunity

Failure began in 2014 and goes all the way through today. Question: Can use the 25% correction option for the most recent years?  Or because the failure goes back so far, do I have to use the 50% to correct for the whole enchilada?

My recollection is because it goes back so far that you use 50% to correct the whole enchilada.  I recall it being similar to the SCP correction window for significant operational failures to go 25% correction option 

I have an excellent ERISA attorney telling me you can split it.  He says he's confirmed with the IRS.  Anyone else been down this road?  I'm taking it because it;s the best answer for my client, but I'd like to tea it up as "isn't this  great attorney I recommended for you?" and that most people were under the same impression as me...

Revenue Procedure 2015-28 specifically mentions this "rolling" correction method. This language does not appear in Revenue Procedure 2016-51. Whether this was an intentional change, or an inadvertent omission by the IRS, I can't say.

https://www.irs.gov/pub/irs-drop/rp-15-28.pdf

P.S. - FWIW, I just took a look at Sal's EOB, and it mentions that the IRS informally opined at the 2015 ASPPA Conference that the applicable correction method is based upon when the operational error BEGAN.

I guess I'm confused (not surprising).  This modification was to encourage early correction of elective deferral failures.   I thought the rolling period (from 2015-28) was for each affected employee that had an operational failure.  So, someone who has an elective deferral failure that began back in 2014 would have the entire period corrected at 50% because it goes beyond the 2 years following the year of the failure.  I'm sure I am misunderstanding how it is being corrected.  Is it that the employee deferral failure goes back to 2014 for some affected employees and for others it started, for example in say 2017?  So, the correction for failure to the affected employee(s) that began in 2014 is 50% of the entire missed deferral amount to the date of correction and the 2017 missed deferral amount through now is corrected at 25%?

In my example it is one single person.  For 2014 through 2016 the attorney is telling me that we use the 50% correction, and for 2017 through today we can use the 25% correction.

I'm cutting corners in terms of the precise dates, but that's not really the purpose of the question anyway.  The true purpose is whether you can split the baby as they say and calculate using the 50% for the periods outside the SCP/Significant failure window, and 25% for those inside.

This guy is listed as an ERISA "super-lawyer" and has loads of accolades.  He is definitely the real deal.

26 minutes ago, austin3515 said:

I'm cutting corners in terms of the precise dates, but that's not really the purpose of the question anyway.  The true purpose is whether you can split the baby as they say and calculate using the 50% for the periods outside the SCP/Significant failure window, and 25% for those inside

 

If the Service gives you a problem, tell them you are using King Solomon as precedent.

Making note of that right now - King Solomon - got it.  Thanks.  

From Michael J. Canan's § 16:2.Employee Plans Compliance Resolution System (EPCRS)—SCP, VCP, and audit CAP:

Note the last sentence of the second paragraph. Maybe one can read that according to their biases. 

4 minutes ago, Rafael said:

(i) correct deferrals begin no later than the second plan year following the year of failure

Hmmm....  I don;t meet this requirement....

It would seem that based on that requirement, that it would not be possible to "split the baby" since the correct deferrals would never be paid within two years of the year of the plan failure. However, it would be interesting to see what your attorney has to say.

Well I asked him, and get this,  My participant terminated and he said that provision should be moot because she was terminated before the end of the 2 year period.  So we only have to meet the notice requirement.

Not a super-lawyer for nothing, that I can tell you.

EDITED: No wait, I still think there is hole here...  The deferralks should have resumed in 2016 while she was still active...

Well, perhaps another way to look at it is from a "risk factor." (I know, ERPA's can't advise clients based on audit risk.)

Realistically, if it is corrected according to the attorney's interpretation, if the IRS does audit I'd have a hard time believing that they would consider disqualifying a plan based on this. So you negotiate, at worst pay a little extra and interest - in essence, same place you'd have been in otherwise, except for the interest, which is typically negligible.

Not saying I'd do it that way myself, but it's another way of looking at it.

It's been mentioned on other threads that the IRS website says that if the participant terminates before the notice is sent that you don't satisfy the safe harbor correction method's notice requirement. It's in the corrective action section on this page.

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-were-not-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees

Could the super attorney be referring to a correction method that is "reasonable and appropriate" under Rev. Proc. 2016-51, 6.02(2) rather than one that complies with the special safe harbor method in Appendix A.05 (8)?  At least, that's what I would try to argue if the IRS decided a couple of years down the road that the correction method used didn't meet the requirements for the safe harbor correction method.

Q/A 22 provides some guidance (albeit informal) on this issue. I think this is what Belgarth's post was citing:

http://www.asppa.org/LinkClick.aspx?fileticket=lHluDaBqAQI=&portalid=2

Here's a twist: We have a client in the same boat, except that missed deferrals began occurring back in 2013 (an automatic enrollment plan where participants were not automatically enrolled, but it's a plan with a few hundred employees who were not enrolled!) and continues on to today. An ERISA attorney and the TPA have calculated the QNEC contribution, but the ERISA attorney wants to "negotiate" the QNEC. Who is he/she going to negotiate with and for what (the amount of the QNEC)? The IRS or DOL? I believe that this is going on through a VCP filing. Does that change things?

20 hours ago, bzorc said:

Here's a twist: We have a client in the same boat, except that missed deferrals began occurring back in 2013 (an automatic enrollment plan where participants were not automatically enrolled, but it's a plan with a few hundred employees who were not enrolled!) and continues on to today. An ERISA attorney and the TPA have calculated the QNEC contribution, but the ERISA attorney wants to "negotiate" the QNEC. Who is he/she going to negotiate with and for what (the amount of the QNEC)? The IRS or DOL? I believe that this is going on through a VCP filing. Does that change things?

Your description sounds like the attorney wants to file under VCP and propose what he thinks is a reasonable and appropriate correction.  The IRS may agree to the proposed correction method, or they may want a different method used.  I wouldn't be surprised if it is done as an anonymous VCP filing.   

I think they would be more amenable to it if it would bankrupt the sponsor or close to it.  That sounds dreadful.