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New Methods for Correcting Elective Deferral Errors

Plan sponsors can avoid or pay reduced corrective contributions for certain elective deferral errors in 401(k) and 403(b) retirement plans, including:

  • Incorrect automatic contributions or automatic escalation of elective deferrals
  • Failure to correctly determine or withhold elective deferrals
  • Exclusion of eligible employees

Revenue Procedure 2015-28 contains the details and conditions for new safe harbor correction methods. These methods supplement, but do not replace, Revenue Procedure 2013-12.

Auto contribution and escalation errors

Sponsors of 401(k) and 403(b) plans with automatic contribution and escalation features generally don’t need to make corrective contributions for missed or incorrectly calculated employee elective deferrals if certain conditions are met. Revenue Procedure 2015-28 adds new Appendix A, section .05(8), to Revenue Procedure 2013-12.

No corrective contributions are required if correct deferrals begin by the first payment of compensation made on or after the earlier of:

  • 9½ months after the end of the plan year in which the failure first occurred, or
  • the last day of the month after the month the affected employee first notified the plan sponsor of the error.

The plan sponsor must issue a written notice to affected employees (and provide corrective matching contributions, if applicable). See below.

Sunset – This safe harbor is not available for failures occurring after 2020, but the IRS will consider whether to extend it.

Early correction of elective deferral errors

To encourage early correction of employee elective deferral failures, all 403(b) and 401(k) plan sponsors pay less for early correction of employee deferral errors. Revenue Procedure 2015-28 adds Appendix A, section .05(9) to Revenue Procedure 2013-12.

No corrective contributions are required for missed employee elective deferrals if correct deferrals begin by the first payment of compensation made on or after the earlier of:

  • three months after the failure first began for the affected employee, or
  • the last day of the month after the month the affected eligible employee first notified the plan sponsor.

25% corrective contributions for missed employee elective deferral failures are required if the period of failure exceeds three months but correct deferrals begin by the first payment of compensation made on or after the earlier of:

  • the last day of the second plan year after the plan year in which the failure first began for the affected employee, or
  • the last day of the month after the month the affected eligible employee first notified the plan sponsor.

The plan sponsor must issue a written notice to affected employees (and provide corrective matching contributions, if applicable). See below.

Notice, matching contributions and missed earnings

To use the new safe harbor corrections for employee elective deferral failures, the plan sponsor must:

  1. Give written notice to the affected employee no later than 45 days after the date correct deferrals begin; and
  2. If applicable, make corrective contributions to make up for missed matching contributions, plus earnings on all missed contributions and deferrals, within the two-year timeframe used to correct significant operational failures under Revenue Procedure 2013-12 (see self-correction of plan errors).

If these requirements are not met, the plan sponsor may use the other safe harbor correction methods under Revenue Procedure 2013-12, Appendix A, section .05 or Appendix B.

Calculating earnings

Calculate earnings using the plan’s default investment alternative if the participant hasn’t chosen an investment alternative.

  • Cumulative losses don’t reduce the corrective contributions.
  • Plan sponsors can’t use this method unless they meet the conditions specified in in Revenue Procedure 2015-28.

Content of written notice issued to affected employees

The specific content that needs to be in the written notice is listed the new Appendix A language added by Revenue Procedure 2015-28, Section 4.

  • No need to list specific dollar amounts of missed deferrals
  • No need to list dollar amounts of corrective contributions

Additional resources

Page Last Reviewed or Updated: 13-Apr-2016