Jump to content

Employer failed to recognize employees as eligible for the 401(k) Plan - so much to unpack - Help!


HarleyBabe
 Share

Recommended Posts

Hi All - not sure where to start with this mess!  Have an employer who failed to notify their employees that they were eligible for the 401(k) Plan.  They thought they had an owner only 401(k) plan (so they say!).  I'm trying to determine the steps now to correct.  I've reviewed EPCRS.  I'm having trouble determine the corrective contribution because no NHCEs were able to defer so I have no average to give them and I can't find a default percentage when this occurs.  Someone told me 4% but I can't find that anywhere.  Also, of course now we have ADP testing every year since 2017 and there will be corrections for that and because it's been 12 months since the correction, there will be corrections for that.  Add to that the tax form filing.

I feel like there is a building block of contributions and penalties that will be due.  The filings or non-filings I know how to handle.  I guess I'm looking for some direction on is there an overall way to correct this or will I just need to go piece by piece and add it all up.    Suggestions as to how to handle and is the 4% per year per person the correct default QNEC to provide?

Thank you.

 

Link to comment
Share on other sites

Caveat - going from memory - just based on my quick reading of 2021-30 when it came out.

1. Was the first year of the error 2017? If so, then even under the new Rev. Proc. 2021-30, it would be too late for SCP. It allows self correction until the end of the 3rd plan year following the year of error. So you'd have to do at least that year under VCP.

2. Is this a safe harbor plan? Match or nonelective? If so, then your "missed deferral" is ether 3% (for the nonelective) or the greater of 3% or the maximum deferral percentage which would be eligible for a 100% match (i.e. 3% for a non-enhanced safe harbor). And possibly catch-up corrections, etc.

I'm not sure where the 4% comes from.

Fun times.

Link to comment
Share on other sites

17 hours ago, rocknrolls2 said:

I agree with John Feldt ERPA CPC QPA. Remember, the QNEC amount is for the missed deferral which is 50% of the 3% or 1.5% for each NHCE for each year.

Plus earnings.

QKA, QPA, CPC, ERPA

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

Link to comment
Share on other sites

I would be leery of assuming the correction is 50% of the missed deferral.  That applies in cases where the employee knows about  the plan and should have been watching to make sure his deferrals started when they were supposed to.  So the employee bears some responsibility in the error.  But in this case, I suspect the employees may not have even known there was a plan.  

Link to comment
Share on other sites

FWIW, i would use the percentage needed to pass the ADP test.  Surely failing to offer the plan to R&F is not an excuse to bypass the ADP test!  So, if your HCE deferred 6%, i would use 4% for the NHCEs.  If your HCE deferred 10%, I would use 8%.  But, if you are going into VCP, you have an opportunity to make other suggestions for corrections. I'm just not sure why the IRS would accept a lower rate.

Link to comment
Share on other sites

  • 3 weeks later...

All - Ilene in particular - so I hear what you are saying on the ADP and makes total sense.  I'm reading EPCRS examples and verbage for correction and it says you can perform the ADP testing prior to the correction of excluded employees......that being the case, they were all excluded and therefore no NHCEs so no testing issue.  I mean technically if I go by what EPCRS states unless I still should include them with 0's.  It doesn't say that though so I'm still perplexed on what to do.  If I give them enough to pass testing period and just go that direction, we're talking 30% QNECS for a bunch of employees for a couple years.  Suggestions?  

Link to comment
Share on other sites

1 hour ago, BG5150 said:

Take the HCE ADP and subtract 2.  Or, if HCE % is under 4, divide by two.  If it's over 10% divide by 1.25.

Just a thought.

Times two up to two plus two over two until you get to 2 * 2 * 2. Then it's (100 + ( 5 * 5 )) / 100. If Tom were here he could sing it to you.

Link to comment
Share on other sites

4 minutes ago, Mike Preston said:

Times two up to two plus two over two until you get to 2 * 2 * 2. Then it's (100 + ( 5 * 5 ) / 100. If Tom were here he could sing it to you.

That's for the NHCE %.  I'm using HCE % and working backward.

But that little saying is ingrained into me for many years...

QKA, QPA, CPC, ERPA

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

Link to comment
Share on other sites

30% QNEC? Wow. I guess it could have been worse, if you had an owner deferring 90% of pay on very low pay. I think a VCP application to negotiate something reasonable would be worthwhile. Describe what caused the plan sponsor to believe the employees weren’t eligible and offer a reasonable QNEC solution for the Service to consider (prepare to negotiate). Also, make sure there wasn’t any other operational failure here. I’ve seen some “solo-k” documents that say the plan automatically freezes contributions (no further deferrals) if an employee would become eligible (other than the 100% owner and spouse). 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...