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Recent Developments – July/August 2015


IRS updates elective deferral failure correction methods

An elective deferral failure occurs when a plan sponsor fails to correctly implement a participant’s elective deferral. This includes elective deferrals pursuant to an affirmative election or to an automatic contribution feature (including an automatic escalation). For example, if a participant enrolls at 6 percent and the plan sponsor fails to withhold elective deferrals, an elective deferral failure has occurred. It also occurs if a plan sponsor fails to provide an employee with the opportunity to make an affirmative election because the employee was improperly excluded from the plan.

On April 2, 2015, the IRS updated its Employee Plans Compliance Resolution System (EPCRS) regarding corrections involving elective deferral failures in 401(k) plans. The guidance was issued in response to comments received by the IRS indicating that the existing elective deferral correction rules overcompensate participants (especially in situations where failures last for short periods) and that participants have the opportunity to increase elective deferral contributions in later periods. The IRS also received feedback indicating that high costs related to correcting elective deferral failures in automatic arrangements were discouraging employers from adopting automatic enrollment features. Revenue Procedure 2015-28 introduces new correction methods that significantly reduce the cost of corrections related to deferral failures.

DOL proposed fiduciary definition

On April 14, 2015, the U.S. Department of Labor (DOL) issued its long-awaited proposed definition of “fiduciary.” A proposal had been introduced in 2010 but was eventually withdrawn. When finalized, the new definition will have a major impact on who is considered to be a fiduciary.

Historically, a 401(k) plan sponsor is a plan fiduciary. As such, the sponsor makes sure that investments made available to participants are prudent and looks out for participants’ best interest.

Since trillions of dollars of retirement savings end up in traditional IRAs, the DOL is seeking to have the same fiduciary protection participants are used to having in their qualified plans apply when individuals roll their money into IRAs. To that end, the individual who advises a participant to roll his or her money from an employer’s qualified plan to an IRA could be deemed to be a fiduciary. The proposed regulation strives to ensure that those providing participants with investment advice for a fee are acting in the participants’ best interest, not providing “conflicted advice.” A comment period will run until July 4, 2015.

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