This article is the fourth in the series addressing the 81 pages of guidance on the legislation known as SECURE 2.0 (the Act) enacted on December 29, 2022, issued by the IRS on December 20, 2023 as Notice 2024-02 (Notice). The first article addressed the extension of the deadline for written amendments and de minimis financial incentives to enroll in a 401(k) or 403(b) plan. See Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. The second article discussed Roth employer nonelective and matching contributions. See Guidance on Roth Nonelective or Matching Contributions in IRS Notice 2024-02. The last article addressed guidance on the Act’s requirement that new 401(k) and 403(b) plans after December 31, 2024 must provide for automatic enrollment. See New Plan Automatic Enrollment Guidance Under IRS Notice 2024-02. This article will now address guidance under the Notice for the Act’s safe harbor for self-correcting reasonable administrative errors in administering automatic enrollment and automatic escalation features in 401(k), 403(b) and other plans with such features.
Expired EPCRS Safe Harbor.
The Employee Plans Compliance Resolution System set forth in Rev. Proc. 21-30 (EPCRS), contains a self-correction safe harbor for correcting the excluding of eligible employees in automatic enrollment or automatic escalation failures (Automatic Failures) in 401(k) and 403(b) plans. It permits Automatic Failures to be self-corrected within the earlier of the first payment of compensation after: 1) 9.5 months of the end of the plan year in which the Automatic Failure occurred; or 2) being notified by the affected employee of the failure (Correction Deadline). The safe harbor allows employers to begin making the correct automatic enrollment elective deferrals by the above Correction Deadline without having to make-up the missed elective deferrals by making QNEC contributions of 50% of the missed deferrals otherwise required under EPCRS. All affected employees have to be corrected and if they also missed out on applicable matching contributions, the employer had to make corrective matching contributions, adjusted for earnings, as if the deferrals were timely made. The employer is required to provide a notice of the failure to all affected employees within 45 days after correct deferrals begin. The notice has to include a statement that the correct deferrals have begun and that the employee may increase their elective deferrals to make up for the missed deferrals. However, this safe harbor expired on December 31, 2023.
SECURE 2.0 Safe Harbor.
The Act codified, made permanent, and expanded the expired safe harbor in EPCRS. It expanded it to include governmental 457(b) plans and certain SEP and SIMPLE plans that can have automatic enrollment. It also clarified that the safe harbor correction could be made after an employee has terminated employment and even after the failure was identified under an IRS examination.
The Notice generally provides that to self-correct under the Act, employers would follow the rules under the expired safe harbor of EPCRS. However, it provides guidance on: the effective date of the Act’s safe harbor correction; how to self-correct for failures relating to terminated employees; and when corrective matching contributions must be made.
Effective Date. The Notice clarifies that the safe harbor correction is available for Automatic Failures which began before 2024, so long as the Correction Deadline for the failure is after December 31, 2023. The Notice provides an example where the employer failed to automatically enroll an eligible employee in a calendar year 401(k) plan on January 1, 2023, and the employee did not inform the employer of the error. Therefore, the Correction Deadline is the first compensation payment date after October 15, 2024 (9.5 months after 2023). Since the Correction Deadline is after December 31, 2023, the employer can use the safe harbor.
Terminated Employees. The Notice provides an employer would correct Automatic Failures for terminated employees in the same manner as active employees, including making matching contributions and earnings. However, while still having to provide a notice of the failure, the notice to such terminated employees would not have to include a statement that correct amounts have begun to be deducted from compensation as elective deferrals or that the employee could increase elective deferrals.
Matching Contributions. The Notice provides that corrective matching contributions and earnings (Matching Contributions) must be made within a reasonable period after the correct elective deferrals begin (or would’ve begun for terminated employees). If the Matching Contributions are made within six months after the correct elective deferrals begin (or would’ve begun if not terminated) they are deemed made within a reasonable period. In addition, with respect to an Automatic Failure in a 401(k) or 403(b) plan that begins before December 31, 2023 and qualifies under the expired EPCRS safe harbor, the employer could make the Matching Contributions by the end of the third plan year following the year in which the failure occurred.
The Act’s safe harbor correction for Automatic Failures is a welcomed extension of the expired EPCRS provision. The guidance under the Notice also provides some important and beneficial clarification as more employers are going to be dealing with automatic enrollment when it becomes mandatory for plans established after 2024.