With the deadline for first enrolling employees eligible under the SECURE Acts’ long-term part-time employees (LTPTEs) rules rapidly approaching for many plans (and potentially already passed for some non-calendar year plans), we know that errors may occur. So, what should a plan sponsor do if it discovers that LTPTEs have not been properly enrolled?
Self-Correction Program (SCP) or Voluntary Correction Program (VCP)
The SECURE 2.0 Act of 2022 (SECURE 2.0) expanded the self-correction program under the Employee Plans Compliance Resolution System (EPCRS) to make more plans and more errors eligible for self-correction.
Plans now may correct nearly any eligible inadvertent failure using the self-correction program before the plan is selected for examination by the IRS. The plan sponsor does, however, need to demonstrate that it had practices and procedures in place to prevent errors, and the error needs to be corrected within a reasonable period of time after discovery (generally within 18 months).
The IRS has not provided any special correction options related to LTPTEs. In other words, there are no special rules applicable to deferral errors related to LTPTEs as compared to deferral errors for any other participants.
The general rule is that when a participant is not enrolled properly, the employer must make a corrective contribution (a qualified nonelective contribution) based on the amount the employee is deemed to have missed deferring using rules set forth in the EPCRS guidance. But, that contribution can be reduced or eliminated depending on when the error is corrected and whether the plan includes an automatic contribution arrangement (i.e., automatic enrollment).
Automatic Enrollment or Not?
Prior to 2025, plans generally can choose whether or not LTPTEs will be automatically enrolled in the plan. While automatic enrollment does present administrative challenges, it also provides a distinct advantage if any deferral errors occur.
SECURE 2.0 expanded and made permanent a very favorable correction for plans that use automatic enrollment. For a deferral error—including a failure to enroll an employee and/or offer an affirmative election—that involves a participant who is covered by an automatic contribution arrangement, the plan generally does not have to make a corrective contribution related to the missed deferrals as long as certain requirements are met and the error is corrected within 9.5 months after the end of the year in which the error first occurred (i.e., by the extended Form 5500 due date).
This correction is available for all affected individuals—even those who terminated employment after the error occurred and prior to the time of correction.
By contrast, a plan that does not use automatic enrollment generally will have to make a corrective contribution for any missed deferrals as follows: (a) 0% of the missed deferrals if corrected within 3 months after the error first occurred (provided certain requirements are met) or (b) 25% of the missed deferrals, plus earnings, if corrected by end of 3rd plan year after the error first occurred (provided certain other requirements are met). However, these favorable corrections are available only for affected individuals who are still employed when the error is fixed and correct deferrals begin. For terminated individuals and any other correction that doesn’t meet the requirements, the employer will have to make a corrective contribution equal to 50% of the missed deferrals, plus earnings.
In all cases, regardless of the corrective contribution (if any) that is owed for the missed deferrals, a correction for any missed matching contributions must also be made. The matching contribution is generally based on the amount of deferrals the participant elected to make, or is deemed to have elected under the EPCRS rules, had there been no deferral error.
However, LTPTEs are not required to receive employer contributions, and therefore often will be excluded from receiving them —meaning that the only corrections for failure to timely enroll an LTPTE will relate to the missed deferrals.
Thus, all plans will have at least 3 months to detect and correct errors related to LTPTE enrollment, with little to no corrective contribution needed. Plans that fail to enroll an LTPTE who is subject to the plan’s automatic enrollment feature will have a significantly longer period to detect and correct the error without a corrective contribution—up to 21.5 months after the LTPTE was supposed to be enrolled.
Notice Required for Favorable Corrections
In order to receive the 0% or 25% favorable correction described above, the plan must meet a number of specific requirements, including giving a notice to the affected participants. In all cases, the notice must be provided to affected employees no later than 45 days after the date the correct deferral amounts begin. If the notice is not provided timely, the employer will lose the 0% or 25% correction option and have to provide a corrective contribution of 50% of the missed deferrals. Therefore, attention to timing of this notice is extremely important.
In summary, while errors are likely to occur as employers attempt to respond to the recent proposed regulation and enroll new participants, including LTPTEs, the potential cost of corrections is minimal in many cases. However, just because the correction is minimal, doesn’t mean that employers should use less than their best efforts to enroll LTPTEs timely on January 1.
An intentional or willful disregard of the LTPTE rules would eliminate the employer’s ability to use the self-correction program (being viewed as a failure to follow practices and procedures to avoid errors), which would transform a very minor correction into a significantly more expensive correction. Thus, all efforts to properly notify and enroll the newly eligible LTPTEs should be taken.
If an error does occur, then there are remedies available under EPCRS to keep the plan in compliance. As always, it is recommended that an experienced ERISA counselor or practitioner be consulted when making an EPCRS correction.
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