New Forgiveness for Auto-Enroll Errors, But With a Catch

 

Last month we talked about some of the knowledge gaps with an auto-enrollment plan.  
 
The good news is the IRS eased the penalties for automatic enrollment errors in April, but there is a catch in order to qualify*. 
 

Here’s What You Need to Know

 
Let’s look at two scenarios to see how the new safe harbor correction method compares to the old correction method.

 

      Scenario 1                                                                Scenario 2


$1,066                                                                           $0

New Correction Method                                                         New Correction Method 

 

$2,200                                                                        $1,134

Old Correction Method                                                            Old Correction Method


The Error: Frank’s auto-enrollment at 4% was missed on January 1, 2014.
Scenario 1 has a company match of 50% on first 4%. Scenario 2 has no match.  
See footnote for plan and calculation details.**

 

Why the Penalty Drops

 
From the two scenarios above, the penalty for making a mistake is no longer as costly because your client is not required to make up 50% of the salary deferral on behalf of the employee.  
 
This removes a major objection a lot of plan sponsors had toward adopting the auto-enrollment feature into the plan.  
 

The Catch

 
Be aware that the plan must find and correct an error to withhold within 9.5 months after the plan year in which the failure occurred, or the old penalties apply.  
 

3 Practical Ways You Can Help Your Clients Benefit From These Changes:  

 
Tip 1:  Some advisors have not recommended automatic enrollment plans to certain plan sponsors because of the potential penalties under the old correction methods. But as we see from the two scenarios above, the penalty for making a mistake is no longer as costly. Let your clients and prospects know the penalties have been updated so they can take another look at auto-enrollment.    
 
Tip 2:  Suggest to your clients who have adopted auto-enrollment that you meet every spring to review the plan together. This will help ensure errors are caught and corrected in accordance with the new safe harbor correction methods on auto-enrollment. 
 
Tip 3:  Some clients will want to have a third party review the plan periodically to make sure the auto-enrollments have been handled correctly. For these types of clients, you might suggest they look at hiring a TPA that offers 3(16) services. 3(16) services handle many of the HR functions for the plan. If you would like more information about 3(16) services, contact Avintus at 615-577-9932 or rtatum@avintus.com.
 
 
* On April 2, 2015, the IRS released revenue procedure 2015-28. In a nutshell, whenever a plan sponsor misses elective deferrals for an eligible employee under an automatic enrollment or automatic escalation feature, they no longer have to make a qualified non-elective contribution (QNEC) for the missed deferrals assuming certain criteria are met. (http://www.irs.gov/pub/irs-drop/rp-15-28.pdf)
 
**Frank Smith makes $50,000 annually, should have been default enrolled on January 1, 2014 at 4%, with a company match of 50%. The error was caught in January 2015, so Frank missed out on deferring $2,000 for the year and a match of $1,000 plus lost earnings. Under the old regulations, the plan sponsor would be required to make a QNEC of half of the missed deferrals, the entire missed match, and the earnings. Estimating total missed earnings of $200 on the deferrals and match, here is how the costs would compare under the old correction method versus the new.