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Bazaarly the answer is no. From the ERISApedia Plan Corrections textbook (highly recommend!) The plan must perform ADP/ACP testing before correcting errors resulting from failure to implement or improper exclusion. If the plan fails either the ADP or the ACP test, it must first correct those tests before correcting Elective Deferral Failures. EPCRS adds: In order to determine whether the plan passed the ADP or ACP test, the plan may rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan, and may disregard the employees who were improperly excluded. [EPCRS App. A §.05(2)(g)]

If the employee met the eligibility and entry provisions before start her maternity leave, then she is will get an allocation at the end of the year. Some plans have a provision that an employee who would first meet the eligibility and entry requirements after starting maternity leave are excluded from receiving an allocation as of the plan year end allocation date, BUT upon return from maternity leave, the employee must be given an allocation as if she was active on the allocation date. If the employee in the OP started leave under these circumstances, then check the plan provisions applicable to leaves of absence and year-end allocations.

The employee can still contribute to the 403(b) plan, they just don't get the immediate tax benefit. For those of us in the business a long time, there was a time when 401(k) pre tax deferrals were not recognized for state tax purposes. I live in CA and they still don't recognize HSA contributions for income tax purposes.

If the absence is “(i) by reason of the pregnancy of the individual, (ii) by reason of the birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement,” ERISA §§ 202-203 set up mandated provisions for crediting service and not having a break in service. And the U.S. Family and Medical Leave Act might provide some benefit-continuation rights. These might bear on how a plan’s fiduciary reads and interprets a last-day condition.

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Thirded!

Agree - not a severance of employment.

Doesn't sound like a severance of employment to me.....

I'm 99% sure I know the answer, but I wanted to be 100% sure. If a participant is on maternity leave at the end of the year, are they still considered employed on the last day of the Plan Year in order to be eligible for a Profit Sharing contribution (the participant had worked over 1,000 hours prior to going out on leave)? Thanks in advance!

Ah, thank you!

Numbers789, when you asked other TPAs, did you make clear that your situation is not about a partner of a partnership or a member of a limited-liability company treated as a partnership, but rather about a shareholder of an S corporation? If your client (whichever person that is) asks you to perform services assuming the plan administrator’s reckoning of compensation, consider, with your lawyer’s advice, whether to ask your client to indemnify you against your losses and expenses from having followed your client’s instruction—if such a provision is not already in your service agreement. This is not advice to anyone.

That legislation is proposed does not mean it will be enacted. Before 1984, people complained about New Jersey law’s income tax treatment of § 403(b) participant contributions. Criticisms became more focused when New Jersey enacted an exclusion from income for § 401(k) deferrals, but not for § 403(b) or § 457(b). After 42 years’ asymmetry, one might wonder about the legislative prospects. If the NJ-burdened employee prefers non-Roth elective deferrals and the charity is amenable to helping her, the charity might consider establishing a plan with a § 401(k) arrangement. That plan might be available to an employee who is a resident of New Jersey. Conversely, a § 403(b) plan might exclude an employee who is eligible for the employer’s plan that includes a § 401(k) arrangement. An employee who is eligible to make a § 401(k) cash-or-deferred election under a plan of the employer may be excluded from § 403(b)(12)(A)(ii)’s universal-availability condition. 26 C.F.R. § 1.403(b)-5(b)(4)(ii)(B) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-5#p-1.403(b)-5(b)(4)(ii)(B).

The doctors have historically paid themselves W2 wages above the compensation limit. Each doctor has a different CPA. One of the CPAs wants to lower their doctor's wages below the compensation limit but I told them that could negatively impact the retirement calculations. In turn, the plan administrator said they will include their K-1 income which makes the W2 amount moot for the calculations. I feel like I must be missing something as I've asked this same question to four different TPAs. Two said they only use W2 wages and two said they would include K1 income (including the plan administrator on the plan).

When the Internal Revenue Service had some humans who would read a few individuals’ income tax returns, one might look at an S corporation’s tax return information about the business and an individual’s description of her occupation to consider whether a shareholder-employee’s wages was reasonable compensation for her work. I imagine now many tax preparers, even some Certified Public Accountants and Enrolled Agents, no longer worry that the IRS might challenge the reasonableness of a shareholder-employee’s compensation. If a shareholder-employee is tempted to declare wages less than reasonable compensation, does it make sense to declare at least the amount that supports her desired retirement contributions?

OH, OH, OH!!! NY 3329 (February of 2026!) is a new bill which would extend the state (New Jersey) income tax exclusion to employees of non-profits with 403(b) deferrals! The Bill is in Committee in New Jersey. "Specifically, it excludes elective contributions made by these employees to their retirement plans from New Jersey's gross income tax. This includes contributions to plans authorized under section 401(k) of the federal Internal Revenue Code for private sector workers, and now extends similar tax deferrals to employees of governments and non-profits who contribute to elective deferred compensation systems allowed under federal law, such as those established under section 403(b) for charitable, educational, and religious organizations,"

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Plan Sponsor adopting new 403(b) plan and has a New Jersey Employee. The Employee has discovered that 403(b) deferrals are not pre-tax in New Jersey (Pre-Tax Federal but not NJ taxes). What can be done for this employee?

Self employment income could be an issue soon for limited partnerships and LLCs - even if they are active in the business and have received SE income for years. The Fifth Circuit (including Louisiana, Mississippi and Texas) recently defined the term “Limited Partner” for Purposes of the 1402(a)(13) Exception to Self-Employment Tax in Sirius Solutions, L.L.L.P. v. Commissioner. While the opinion indicated LLCs were not considered, you can be sure they will soon be a case involving LLCs.

Believe me, this is where I started the argument against even considering this. This is what I was afraid of. I mean, not "afraid", since I'm glad to not have this as a recommended option.

It's a game accountants like to have their clients play to minimize their FICA and Medicare payroll taxes, which often screws them out of the ability to make maximum retirement contributions (not to mention limiting their ultimate Social Security benefit if below the SSWB). If W2 is already over the SSWB then it's only 2.9% Medicare taxes they are saving, which is not smart when the retirement contribution percentages missed out on are typically much higher. S-corp plan comp is W2, K1 is not included, that is not an item open to plan administrator interpretation and if they insist on doing so I would likely resign from that engagement.

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After seeing the follow up posts, I reread the OP and have a couple other items to note. The prior recordkeeper is doing what is required under the Regulations. I don't believe they have a choice "to change their mind." As previously noted, the defaulted loan must be taking into account in determining the limits on any new loan but I omitted the requirement that "phantom interest" also must be taken into account for those purposes. See Treas. Reg. §1.72(p)-1 Q&A 19 ("A loan that is deemed distributed under section 72(p) and that has not been repaid...").

A participant had a Missed Deferral Opportunity in 2025. There were missed match contributions associated with the Missed Deferral Opportunity. Should the Missed Match be included in Compliance Testing? Thanks.