Bonus and Employee Elective Deferral Failure

[JRN]

Definition of Compensation under the Plan includes Bonuses. Employer pays a bonus on Aug 15, 2017. Employer fails to correctly apply the participant's 401(k) election percentage to the bonus. Employer discovers the mistake on Oct 15, 2017.  Does the missed deferral opportunity on the bonus qualify for the safe harbor correction method for Employee Elective Deferral Failures that do not exceed 3 months?

1.  Correct deferrals have been made by the Employer on all payrolls subsequent to Aug 15, 2017.

2.  The Employer will make a corrective contribution to make up for any missed matching contributions for the bonus.

3.  The Employer will provide the required notice to affected employees on Oct 31, 2017 (within the 3-month period beginning on the date of the failure). 

One problem, of course, is that none of the payroll periods since Aug 15, 2017 have included bonuses. So, I'm not sure we can really say we've satisfied conditions #1 and #3, above. I'm especially hung up on the 45-day notice requirement. 

From a matter of policy however, it seems that the affected employees still have time to make up the missed deferral opportunity if they want to. So, maybe this error should qualify for the new safe harbor correction (i.e., no QNEC required).  But, on the other hand, this might be better analyzed as simply an operational defect and, therefore, requiring a 50% QNEC.

Thoughts?

Thank you.

[K2retire]

I would say that your clock starts with the next paycheck after the bonus, not the bonus check itself. I'm not sure that helps, but it might.

[Mike Preston]

This exact topic was recently discussed.