401(k) plans get 3 new safe harbors — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

401(k) plans get 3 new safe harbors

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in Office Management,Payroll Management

If you have an auto-enrollment 401(k) or 403(b) plan—where employees must opt out of the plan to receive their full salary—or a plan with escalation features, then you probably have administrative problems. Run-of-the-mill 401(k) plans aren’t a piece of cake to administer, either. The IRS has created three new safe harbors under which you don’t need to make corrective contributions (usually 50% of the employee’s missed pretax deferral) for missed or incorrectly calculated employee pretax deferrals if certain conditions are met. The safe harbors became effective April 2, 2015. (Rev. Proc. 2015-28, IRB 2015-16)

Safe harbor #1—auto contribution and escalation errors. This safe harbor applies when the failure to implement employees’ pretax ­deferrals doesn’t extend beyond 9½ months after the end of the plan year during which the failures occurred. You don’t have to make corrective contributions if employees’ correct pretax deferrals begin by the earlier of the first payment of wages made on or after the last day of the 9½-month period or, if you were notified of the failure, the last day of the second month after you received notification. You must make contributions to make up for any missing matching contributions, if employees had been entitled to additional matching contributions had their deferrals been implemented correctly.

This safe harbor is available until Dec. 31, 2020. After that, the IRS will consider extending it to later years.

Safe harbors #2 & #3—early correction of pretax deferral errors. These safe harbors apply to all plans, not just auto-enrollment plans. Which safe harbor applies depends on when you become aware of the failure.

  • Under safe harbor #2, no corrective contributions are required for missed employees’ pretax deferrals if employees’ correct pretax deferrals begin by the earlier of the first payment of wages made on or after the last day of the three-month period, or, if you were notified of the failure, by the last day of the second month after you received notification. You must make contributions equal to the matching contributions that would have been required, if employees had been entitled to matching contributions had their deferrals been implemented correctly.
  • Under safe harbor #3, a 25% corrective con­­tri­­­bu­­­tion for missed employee pretax deferral failures is required if the period of failure exceeds three months but correct pretax deferrals begin by the earlier of the last day of the second plan year after the plan year in which the failure first began or the last day of the month after the month employees notified you.

NOTICE REQUIREMENT: For all safe harbors, you must notify employees of the correction within 45 days after the date on which their correct pretax deferrals begin.

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