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Guest MarkN

Failure to comply with salary reduction elections

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Guest MarkN

I have a client that added a 401(k) feature to his Plan effective 1/1/03. Several participants completed an enrollment form stating that they wished to begin making salary deferral contributions. No deferral contributions were ever withheld from the employees for the 2003 plan year. I've never encountered a situation like this and am not real sure of the consequences (if any) of the employers reluctance to comply with the employees instructions. Any insight would be greatly appreciated!

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Guest MarkN

After almost a day with no replies, I figured this was a silly question that I was overlooking the answer to so I called EBSA for guidance. They said that if there was no money withheld, there is no problem (in case someone other than me didn't know the answer)

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I think the EBSA employee was only addressing the issue that no deferrals were sent in late.

The fact the deferrals were not taken in the first place - contrary to the participant's instructions - is serious. You need more qualified advice.

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I dont think the the employer can take any corrective measures make up the salary reduction since the 2003 tax year has closed and the employees were paid their salary. The only question is whether the employees have a claim under ERISA against the employer for failure to withold the contributions, if the employer was acting as a settlor in failing to withhold contributions, and not as a fiduciary. Also the employees are contributorily negligent because they should have noticed that no amounts were withheld from their paychecks.

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I agree with Harwood. The individual at the EBSA gave you a very narrow answer to your question and really didn't answer the appropriate question. If you were to call back with the same question, you may just get a different answer each time you call...but enough EBSA bashing!

Your client gave these employees the opportunity to participate and they elected to do so, however, the client then failed to act on that election. I would liken this situation to excluding an eligible employee from participating. The employer is going to need to give these employees a QNEC to make up for their missed contributions.

See Rev. Proc. 2003-44 Appendix A, Item 05.... This spells out the correction method for exclusion of an eligible employee.

Hope this helps!

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Guest AnnieP

Am I missing something here? I thought that if a participant opted to make salary deferrals and the Employer didn't follow through that that participant had to be given a salary deferral based on an average % of the group that he/she belongs in plus the applicable match. Even though this particular instance happened in 2003, I believe that the correction must still be made in order for the plan to retain its qualified status.

If I am under the wrong impression, please so state.

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I agree with mbozek. The employer could be liable for deferrals for a certain period, let's say a month. After that ERISA says that employees have an obligation to mitigate their damages by pointing out that deferrals are not being made.

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Archimage - can you point to where it says that in ERISA? I see a delay of reporting by employees all too frequently.

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Guest jfp

The poster said that no deferrals were taken from any employee's pay. Therefore, if you can use the "QNEC plus earnings" remedy in the EPCRS revenue procedure, isn't the QNEC 0%?

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You probably should contact your own attorney. I'd be leery of doing nothing & relying on participant negligence on this particular issue. Were they effectively given an opportunity to participate if their instructions were not followed?

I can see strong arguments that the employer should have to provide at least a QNEC equal to the average NHCE %'s for 2003 and maybe even that a QNEC should be given based on deferral %'s on the form.

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Guest MarkN

Thank you for all of the insight.

I didn't really feel right about the answer I got from the EBSA so I was glad to see so many of you had objections to their response.

My gut feeling was that an ER contribution equal to the avg % on the forms would be necessary but couldn't find any established basis for it. It just seemed to make sense, if there was a contribution required to keep the qualified status at all.

Archimage - I agree that the participants are partially responsible but how whould you decide the extent of their liability if the employer would have to make a contribution for his negligence?

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I agree with R. Butler and the correction method outlined in Rev. Proc. 2003-44. However, as JFP indicates, the average NHCE/HCE % would be zero since no deferrals were taken for the year. To be safe, you could file under VCP and get a blessing on this approach.

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Guest wls

If the employees filled out election forms that indicated how much they wanted to defer, the IRS would say you have to make a QNEC for each employee equal to the amount elected by that employee. The "average contribution rate" correction methodology is meant to apply when you don't know what an employee would have elected (e.g., because you didn't offer an election).

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