Failure to properly administer automatic enrollment

Top 10 retirement plan internal control pitfalls #5

Sometimes automatic enrollment is not always automatic.

When a plan fails to enroll an employee, or to process their deferral election, that is a missed deferral opportunity. The general correction is for the employer to make a contribution equal to 50 percent of that missed deferral to compensate for that missed tax benefit. In addition, the employer must contribution 100 percent of any missed matching contributions. These contributions are all adjusted for earnings.

The IRS and the Department of the Treasury believe automatic enrollment is a very important feature of retirement plans. But in many cases plan sponsors were not finding these errors until much later, when the plans were audited or when plans were preparing non- discrimination tests. As a result, employers were recently granted significant relief for these auto-enrollment failures. There are no missed deferral opportunity costs for automatic enrollment or automatic increase failures that are found and corrected by the first payroll date after the earlier of either of the following:

  • 9½ months after the end of the plan year in which the automatic contribution or increase should have occurred
  • The last day of the month following the month in which the participant advises the sponsor of the problem

There are some requirements to meet this deadline, including notification of the participant of the error, and the costs may be reduced to only 25 percent or 50 percent of the missed deferral opportunity cost if the error is not corrected within the allotted time.

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