Know the rules and avoid penalties
When participants are unable to contribute to their plan as intended, a plan error has occurred that must be corrected. Recent legislation has made it much easier for plan sponsors to fix plan errors and reduce the costs of doing so. The key is to act quickly!
What are missed deferral opportunities?
Missed deferral opportunities can occur for a variety of reasons.
- Failure to Notify: Failing to notify a participant that they are eligible for the plan and can begin contributing is one of the most common reasons a "missed deferral opportunity" occurs. Plan sponsors can help to avoid this issue by providing information about the plan on their intranet site and handing out plan materials when a participant is hired. BlueStar's fulfillment services also can help! We can automatically notify newly eligible participants of their plan features prior to each plan entry period. The effectiveness of this service, however, is critically dependent on receiving good data with each payroll file.
- Missed Change Request: If a participant enrolls in the plan or makes a change to their contribution rate but the new rate does not go into effect, this error will also result in a missed deferral opportunity. If you use one of the growing list of payroll companies BlueStar integrates with, you can take the human error element out of the equation. If you are making the changes manually, we encourage you to doublecheck your work by downloading the change report for www.MyPlanConnection.com before each payroll is run. That way, you'll always be able to validate that your payroll rates match the change requests we have received. We also encourage you to pay special attention to your Deferral Verification reports. We send these reports when we see a discrepancy between the payroll information and the participant requests. These reports can definitely help avoid issues.
- Missed Automatic Enrollment or Escalation: If your plan includes an automatic enrollment or automatic escalation feature - congratulations! These plan features are some of the very best ways to ensure that plan participants start contributing and get on a path towards a successful retirement. You need to make sure, however, that people who are supposed to be automatically enrolled are actually set up properly or a missed deferral opportunity can occur. And if their rate is supposed to escalate on a certain date, you need to make sure that happens as well. This can be tricky in some cases and mistakes can be made. Be sure to review your automatic enrollment reports and deferral verification reports carefully to help avoid these common errors.
What happens if there is a mistake?
Fortunately, if there is a mistake, the regulations allow for the plan to self correct. As you'll see below, the quicker you catch and fix the issue, the better! If the issue persists, correcting the error can become quite expensive.
Automatic enrollment errors
The government is trying to encourage plan sponsors to include automatic enrollment features in their plan so they have provided a lot of leeway to correct missed deferral opportunities that arise due to the automatic enrollment program. If you miss automatically enrolling someone, here are the rules to fix this plan error:
- Missed Match: If the participant was supposed to be automatically enrolled and as a result missed out on some matching contributions, the first requirement to self correcting the error is to make the participant whole by making up those missed matching contributions and any associated lost earnings.
- Participant Notification: In order to meet the criteria for self correction, the participants that are affected by the error also need to receive a notice that explains what happened and how it is getting fixed. BlueStar or your TPA can help prepare these notices.
- Missed Deferrals: Potentially having to make up the missed deferrals is definitely the worrisome part for plan sponsors. The matching contributions were an expected expense but coming out of pocket for the employee's missed deferrals is a penalty everyone wants to avoid. The good news is that if you miss automatically enrolling someone, so long as you catch the error by the end of the plan year following the year in which the error occurred, you do not need to make up the missed deferrals. A sure fire way to make sure you are never in a position to pay these additional penalties is to take stock of your plan at the end of each year and evaluate whether everyone was automatically enrolled properly. If you find some issues, correct them immediately and avoid any penalties. If the issue is discovered after the end of the year following the error, you will be required to make a QNEC contribution equal to 25% of all the missed deferrals from the time that contributions should have started to the date the issue was fixed.
If the missed deferral opportunity is unrelated to automatic enrollment, fortunately there are ways to correct these errors as well. Like the automatic enrollment fixes, employers will need to make up any missed match and associated earnings, making the participant "whole" for the period of time their deferral should have been in effect. A notice will also have to be sent to the affected participant explaining the error and the correction that has occurred. In contrast to the self correction procedures above, however, unless the error is caught and corrected very quickly, the correction will also require that the sponsor make up some of the participant's missed deferrals by making a QNEC contribution to their account.
- No QNEC Penalty: In order to avoid any penalty, the error must be caught and fixed before the earlier of 3 months from the initial error or 45 days after the sponsor was first notified of the error. If caught this quickly, the regulations do not require a penalty in part because the participant has the ability to increase their contribution rate and make up the missed deferrals themselves.
- 25% QNEC: If the error was fixed after 3 months or more than 45 days from when the sponsor was notified but before the end of the year following the error, a corrective contribution equal to 25% of the deferrals that would have occurred must be made to correct the error. For instance, if a participant elected to defer 5% and would have contributed $2500 if their election had been entered correctly, the corrective contribution would be 25% of $2500 or $625.
- 50% QNEC: If the error was not caught by the end of the year following the initial error, then the corrective contribution increases from 25% to 50% of the entire missed deferral amount.
Bottom line? Making sure that participants know about your plan and that their contribution rates are updated correctly is very important. Fortunately, there is a lot of opportunities to correct any mistakes but the sooner these issues are caught and fixed the better!