(b)lines Ask the Experts – Failing to Start Mandatory Contributions

“We require that our employees contribute 3% of their salary to the 401(a) plan but recently discovered that we had failed to start mandatory contributions for one of our new employees. Does the IRS’ 2015 automatic enrollment correction guidance affect us? How would we correct this error?” 

David Levine with Groom Law Group answers:            

For readers who are not familiar with governmental plans, it is important to note that governmental 401(a) defined contribution plans are a bit different from the 401(k) and 403(b) plans that are most common in the tax-exempt and private sectors.  A key distinction for purposes of this question is that 401(a) governmental defined contribution plans cannot generally have 401(k)-style “cash or deferral election” features unless they are grandfathered plans from prior to May 6, 1986.  However, our reader’s question makes it clear that their institution’s plan is not a grandfathered 401(k).

To answer the first question, at first blush it might seem that the Internal Revenue Service’s (IRS’) helpful 2015 automatic enrollment correction guidance is applicable. However, the sponsor should beware here. Mandatory contributions to a 401(a) governmental defined contribution plan are actually treated as “employer” non-deferral contributions that are “picked-up” pursuant to section 414(h) of the Internal Revenue Code. They are not 401(k) auto-enrollment contributions. As such, the correction guidance is of limited use, since it is limited to 401(k) and 403(b) plans. The Experts are also not aware of the IRS applying its 2015 guidance to governmental 414(h) pick-ups.

So where does that leave the second question?  There are different views of how to make this fix – however, a self-correction involving a non-elective employer contribution of 100% of the missed contribution plus lost earnings is arguably the most reasonable correction under the general Employee Plans Compliance Resolution System (EPCRS) Revenue Procedure 2013-12 because it was an “employer” contribution under Code section 414(h)(2), not an employee or elective contribution. However, the Experts would recommend you check with your counsel for options to address this inadvertent error to see if there may be other practical solutions.

Thank you for your question.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.