Not withholding deferrals

[Guest cconnell]

General Questions regarding a payroll department not withholding elective deferrals.

Here is the scenario:

A client has a 401(k) plan. In 2005, its payroll department manually stopped withholding employee deferrals on 1 eomployee who had reached the maximum deferral limit. However, the payroll department never started the deferral back in 2006, therefore, the participant had no contributions for 2006. The employee did not notify the client until a week ago that he should have had deferrals for 2006.

How would this be handled? Does the client have to correct it considering the employee said nothing about the lack of deferrals when he received his paychecks?

Any input would be appreciated...

[401_4_ever]

This point has been vigourously debated on many earlier posts. Half the board believes this is an exclusion of otherwise eligible employee and a full correction is needed. The other half believes it's the employee's responsibility to monitor their paycheck. There is unclear guidance from the IRS, as guidance only addresses what happens if there is no actual election to defer.

What does your plan document say? It likely created an operational failure...

General Questions regarding a payroll department not withholding elective deferrals.

Here is the scenario:

A client has a 401(k) plan. In 2005, its payroll department manually stopped withholding employee deferrals on 1 eomployee who had reached the maximum deferral limit. However, the payroll department never started the deferral back in 2006, therefore, the participant had no contributions for 2006. The employee did not notify the client until a week ago that he should have had deferrals for 2006.

How would this be handled? Does the client have to correct it considering the employee said nothing about the lack of deferrals when he received his paychecks?

Any input would be appreciated...

[Belgarath]

See Revenue Procedure 2006-27, particularly Appendix A (.05) which will also refer you to specific examples in Appendix B. I think this takes a lot of the "gray" out of some of the prior debates, for me as well. I think this will give you the specific fix that you are looking for. I also second 401's advice to check your plan document, as the document may already specify a fix.

And yes, assuming the participant made a valid election under whatever reasonable requirements established by the Plan Administrator, then it needs to be fixed.

[Guest mjb]

First Q: how much would have been deferred by the participant in 2006 under salary reduction agreement plus matching contributions?

Second Q: How much does the employer want to contribute to correct this error?

Third Q: Does the ans to Q 2 equal the answer to Q 1? If answer to Q2 is less than ans to Q 1 consult counsel.