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Who's Responsible for Deferral Change Request Failure? Participant or the Plan Sponsor?


Jeff_pg

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Here are the facts:

1) A participant submitted a written request to their employer to raise their deferral rate.  The written request was received and acknowledged by the employer (voice and email).

2) In the acknowledgement email from the employer, they told the participant to expect an email confirmation from the record-keeper.

3) At year-end, the participant realized they never did receive a confirmation from the record-keeping, and their request to raise their deferral rate was not implemented.

4) When the participant contacted the employer, the employer said the participant should have noticed that they didn't receive a confirmation from the record-keeper of their request.  Consequently, the employer deems the participant responsible for the mistake, and the employer won't make the retroactive corrections.

Who is responsible for the mistake?  The participant or the plan sponsor?

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Not enough facts, although the answer is likely not to be absolute, no matter what the facts are because it is messy. The missing facts relate to what the plan procedures are for changing deferral elections, how well those procedures were communicated generally, whether or not participants were required to follow the procedures strictly while others stayed in their lanes. Your presentation implies that employee communication to employer is not the appropriate procedure for changing deferral elections, and that the employer did not follow or refer the employee to appropriate procedures

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Thanks for your prompt reply, QDROphile.

I didn't mean to imply that the participant didn't follow the appropriate procedure for changing their deferrals.  In this case, here's what happened:

1) The participant attended a live web-meeting where the employer representative indicated that the typical method of changing their deferrals was through the recordkeeper's website.  However, the website limited the maximum deferral election to 60%.  But, the employer representative indicated that if any employee wanted a higher deferral rate, they should call the employer representative and they could arrange a deferral rate as high as 90%.

2) Within days of the live web-meeting, the participant phoned the employer representative and requested a deferral rate of 90%.  On the phone call, the employer representative asked the participant to email their request to the employer representative (presumably to create a written request?).

3) The same day as the phone call, the participant emailed their 90% deferral request to the employer representative, who emailed back a confirmation indicating that they had forwarded the request to the recordkeeper, and also said to expect a confirmation from the recordkeeper.

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To avoid plan disqualification, the employer is responsible for correction of the missed deferrals, and related match, if any, in accordance with IRS guidance.

As to the ultimate responsibility for the cost of correction, I suppose the employer/plan sponsor can argue with the administrative services provider.

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Look to the plan doc first.  does it allow deferrals up to 90%. The r/k website was coded that way for a reason.  (Maybe it was a mistake, maybe when it was programmed the max was indeed 60% and an amendment was done and somebody dropped the ball, or, again, it was indeed 60% all along)

Does the participant have an SPD that says at least 90% max?

If so, then, yeah, the company is on the hook for the EPCRS correction.  If not, what was the original deferral amount?  Was it already at 60%?  Or lower?

QKA, QPA, CPC, ERPA

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

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A colleague of mine found this:

"A Plan Sponsor cannot avoid liability to make corrective contributions for the missed deferral opportunity by making its employees responsible for checking pay records to ensure deferral election has been implemented."

https://www.irs.gov/pub/irs-tege/epcrs_401k_phoneforum_presentation.pdf

Unambiguous.

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13 hours ago, BG5150 said:

Look to the plan doc first.  does it allow deferrals up to 90%. The r/k website was coded that way for a reason.  (Maybe it was a mistake, maybe when it was programmed the max was indeed 60% and an amendment was done and somebody dropped the ball, or, again, it was indeed 60% all along)

Does the participant have an SPD that says at least 90% max?

If so, then, yeah, the company is on the hook for the EPCRS correction.  If not, what was the original deferral amount?  Was it already at 60%?  Or lower?

The participant's deferral rate was very low (5%?).

In late Oct 2020, they submitted their request to raise their deferral rate to 90%.

The participant noticed their deferral rate wasn't implemented on Dec 21 2020 and reported it to the employer representative that same day.

The rules seem to indicate to me that if the plan sponsor makes the deferral corrections within 3 months of the first missed deferral (early Nov), then the plan sponsor can avoid funding the corrections and the participant must fully fund the corrections.  Is that accurate?

Should the participant expect these correction to be reflected on their 2020 W-2 despite the fact the actual corrections will be made in 2021?

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Does the document allow for 90% deferrals?

If money does not come out of the paychecks in 2020, it will not be reflected on the 2020 W2.

Part of the correction is to make sure this mistake does not happen again.  So, the sponsor must investigate why the r/k had 60% in their system.  Is it a system limitation?  Did it used to be 60% and the plan was amended?  If so, was the amendment disclosed to the r/k?  If so, why didn't they implement it.  Was it just a mistake?

QKA, QPA, CPC, ERPA

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

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In order for the sponsor to be eligible for the safe harbor relief:

[quote](i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;[/quote]

When did the participant notify the employer?  They may still have time to correct this. 

But nothing will be in/for 2020.  It'll all be QNEC & earnings plus deferrals starting in 2021.

QKA, QPA, CPC, ERPA

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

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never mind, just re-read an earlier post that said the EE notified the ER in mid-December.

However, they mus start the deferrals before the end of this month and adhere to the notification requirements in EPCRS.

QKA, QPA, CPC, ERPA

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

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5 hours ago, Bill Presson said:

How does someone ask for a 90% deferral and not notice for 3 months?

 

18 minutes ago, Lisa.Q said:

exactly. not like we're talking 5% to 9%.  5% to 90% is quite the leap.

Not only that... with 90% deferral, net check would be essentially zero.  That's gotta be noticeable.

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