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Safe Harbor 401k - Incorrect Comp used for Deferrals


Gilmore

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Plan Sponsor with a safe harbor 401(k) plan (basic safe harbor match), just learned that for 2017 their payroll company did not apply deferral elections to bonuses paid during the year.  Plan Doc does not exclude bonuses for any plan purposes.

Match is allocated at year end.

In reading through the IRS 401k fix it guide, Example 2 under Mistake 3 (didn't use the Plan's definition of comp), would require a QNEC of 50% of the deferrals that would have been made from the bonuses had the elections been applied, plus earnings, plus applicable match.

However the example goes further to say that with respect to the missed deferrals, "other correction methods may be acceptable to fix that part of this mistake", and refers to Mistake #6 which describes corrections for situations in which "Eligible employees weren't given the opportunity to make an elective deferral election (exclusion of eligible employees)."

The Plan Sponsor just discovered the error (when putting together the year end census data).  They are going to ensure that elections are applied to 2018 bonuses.

I'm thinking based on the reference to Mistake #6, that the QNEC can be limited to 25% of the missed deferral, assuming the QNEC will be made in 2018.

Am I off base on that?

Thanks very much.

 

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I think you have to do #3.

#6 is for when you don't let people start deferring at all.  If people were deferring from their base pay,  then it was the wrong comp used, not an exclusion of an employee.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Thanks.  It's a little confusing when the IRS makes that cross reference between errors.  Also the EOB describes a "missed deferral opportunity" and seems to indicate that the missed deferral opportunity could be either the improper exclusion so the participant was not allowed to deferral at all, or the failure to implement at change, from say 3% to 5%.

I guess trying to argue for 25% would be too aggressive.

Appreciate your taking the time to respond.

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