A missed deferral has ripple effects and is not an isolated event. The sooner it is addressed the better, argued an industry expert in an Aug. 7 ASPPA webcast.
“It is important to get it right and ger the participant where he/she would have been if the error had not happened,” said Mike Smith, a Vice President at Voya Financial, capturing one of the crucial responses to a missed deferral. “Even small amounts that are not deposited can become a detriment to retirement savings,” he noted, citing a long-term effect of such an error.
There are several errors that are considered to be missed deferrals, Smith said, citing failures to:
- implement employee’s affirmative election;
- provide opportunity for employee to make deferral;
- automatically enroll an eligible employee; and
- automatically escalate deferral percentage.
When a missed deferral has taken place, Smith identified three determinations that must be made:
- the type of missed deferral failure;
- what the missed deferral is; and
- how the missed deferral should be calculated.
Corrections for missed deferrals vary based on what the error is, said Smith. But he did identify general correction principles:
- full correction for all affected tax years;
- restore the plan to its prior position where it was before the error;
- follow reasonable and appropriate correction principles;
- if possible, the correction method should resemble one already provided for under the Internal Revenue Code;
- if possible, keep assets in the plan;
- if non-discrimination is an issue, provide benefits for non-highly compensated employees (NHCEs);
- when fixing a missed deferral, one should not violate another applicable IRC requirement in the process; and
- corrections generally should be adjusted for earnings.
If employees were improperly excluded, it is necessary to fix not only the elective deferrals but also employer matches. And there are other factors to consider, Smith said, noting that the correction differs based on:
- type of missed opportunity;
- whether the plan includes auto-enrollment;
- whether the plan is a safe harbor plan; and
- the timing of the corrective action.
Two important concepts are in play when fixing the error of employees having been improperly excluded: a deferral has been missed, and there also has been a missed deferral opportunity. Actions to be taken include:
- make a QNEC that replaces the “missed deferral opportunity”;
- make up the missed match; and
- make up the missed earnings.
When notifying an employee of a missed deferral, Smith said, notices to employees are to include:
- general information about the failure, the percentage of eligible compensation that should have been deferred and the approximate date deferrals should have begun;
- a statement that correct deferrals have begun or will begin soon;
- a statement that a corrective allocation of the missed match will be made;
- an explanation that the affected participant may increase the deferral percentage to make up the missed deferral, subject to plan and IRS limits; and
- plan contact information (name, address, phone number, email address).
There is some good news, Smith said, if an error is a short-term failure. If a failure does not exceed three months, there is no QNEC for missed deferrals if: (1) correct deferrals commence no later than the earlier of the first payment of compensation on or after three-month period, or the first payment of compensation made on or after the last day of month that follows that in which the participant notifies the employer of the missed deferral, and (2) notice of the failure is provided to affected employees no later than 45 days after the date correct deferrals begin.
If a failure exceeds three months but does not exceed the IRS Self Correction Program (SCP) deadline for significant failures, there is a reduced QNEC of 25% under the same circumstances. And in that case, the corrective allocations plus full match and earnings must be made by end of SCP period for significant operational failures.
There also is good news for plans with automatic enrollment, Smith reported. There is no QNEC for a missed deferral for such plans if:
- Failure to implement automatic deferral does not extend beyond 9½ months after the plan year of failure.
- Correct deferrals commence no later than the earlier of the first payment of compensation on or after a 9½ month period, or the first payment of compensation on or after the last day of the month after the month in which the participant notifies the employer of the missed deferral.
- The correction applies even for employees making an affirmative election.
- Notice of the failure is provided to affected employees no later than 45 days after the date correct deferrals begin.
- The plan makes up earnings and full match.
- There is a sunset of automatic enrollment missed deferral correction for failures after Dec. 31, 2020.
Coordination with Correction of Other Operational Failures
It is important to remember, Smith noted, that a missed deferral correction must be done after correction of other operational failures.
More information about the webcast “Correcting Missed Deferrals,” is available here.