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alternative correction of missed deferral amount

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Might a plan self-correct a missed deferral opportunity by allowing the participant to deposit an amount to the plan equal to the missed deferral amount?

Due to an error in plan sponsor's payroll department, an eligible Highly Compensated Employee's deferral election of $24,000 was not carried over from 2016.  This was not discovered until this past month by the participant's tax accountant who was preparing her 2017 tax return.

Plan sponsor is prepared to self-correct under Rev. Proc. 2016-51 by making a qualified nonelective contribution (QNEC) equal to 25% of the Missed Deferral Opportunity, as adjusted for earnings, and supplying the requisite notice.  However, participant and participant's accountant would prefer to pay $24,000 to the plan and have the plan sponsor issue an amended W-2.  Plan sponsor is agreeable, since would save them the cost of the $6,000 QNEC.  However, my initial reaction is that such a deposit would fail to meet the definition of an elective deferral.  While it might be argued that the contribution will be made "pursuant to a cash or deferred election under a cash or deferred arrangement," I don't see how it can be categorized as an "employer contribution."

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i'm inclined to agree with your analysis although not sure I can articulate all the reasons why.   Seems like if they were to do that within the same year that might be easier in some fashion (similar to my client that insists on correcting via payroll adjustments and offsets) and in keeping with the concept that participants can adjust their deferral elections going forward to make up for the missed deferral opportunity.  I particularly worry about doing that after the year is closed and how that would get added back in and adjusted within payroll.

All these recent posts seem to me to point up the need for more guidance and possible flexibility from the IRS on correcting missed deferral opportunities, etc.

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