The Treasury Department and the IRS have issued new guidance making it easier for employers to correct unintended contribution errors in retirement plans featuring automatic enrollment and automatic escalation.
It is the latest move by regulators aimed at encouraging sponsors to implement the savings features in retirement plans.
“Treasury and IRS are taking another step to promote broader participation in 401(k) and similar plans by facilitating automatic enrollment and automatic contribution increases,” J. Mark Iwry, senior advisor to the Secretary and Deputy Assistant Secretary for Retirement and Health Policy, said in a press release.
“These simplified, safe harbor correction methods build on previous steps to encourage plan sponsors to adopt ‘next generation’ features and practices that help employees save for retirement,” he added.
The new guidance simplifies and reduces sponsors’ costs when they fail to contribute the correct amount of deferrals through the features, according to the release.
The action was in response to comments from sponsors, their advocates and recordkeepers suggesting the cost of correcting the errors —and the threat of losing tax-preferred status because of infractions — were deterring wider adoption of the features.
New safe harbor procedures allow sponsors to correct missed deferrals without having to notify the IRS, so long as the correction to the participant’s account is made within 9 ½ months from the end of the plan year the error occurred in.
In the new guidance, Treasury also issued new safe harbors for how sponsors calculate the amount of corrective contributions to make, including calculations for the amount of employer match that may have been missed.
There has been growing support over the past few years for auto enrollment and escalation features as primary tools in addressing retirement savings shortfalls.
Yet adoption has not been universal, and by some measures, may even be stalled.
A recent Callan Investment Institute study of large and “mega” sized 401(k) plans found 61.7 percent now offer automatic enrollment, primarily to new hires. But only a third of plans offer both automatic enrollment and automatic escalation features.
A Vanguard study of plans the fund company works with showed participation rates at 91 percent when auto enrollment is utilized, compared to a participation rate of 42 percent in plans without the feature.
The new safe harbor changes are effective immediately, though they will “sunset” at the end of 2020.