Bonus Payment

[Guest payroll_cons]

What (if any) issues would occur if we failed to deduct 401k on qualified compensation according to the plan document? We paid bonuses and did not deduct 401k even though we should have. Are we obligated to correct it? Thanks.

[JanetM]

Your plan would not be compliant with the plan doc. You risk disqualification (ya I know a long shot). If the auditors find this the employer would be required to correct using their money - not additional deductions from ee's. Your best bet is to fix it quick and get on with life.

[Guest payroll_cons]

I am not sure how to go about fixing it. About 400 employees are affected, bonuses were paid a few weeks ago.

[John Feldt ERPA CPC QPA]

Are you an employee of the company? If so, ask the people who provide the administration services to your plan.

[JanetM]

http://www.irs.ustreas.gov/retirement/arti...=175716,00.html

[Kevin C]

The rules are different for a brief exclusion versus a longer term exclusion. If you can make sure this only happens once, I would think this would be a brief exclusion. It will be worthwhile to read through Rev. Proc 2008-50.

Rev. Proc. 2008-50, Appendix B, Section 2.02(1)(a)(ii)(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Contributions. An employer is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and ©, but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D) for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals or after-tax employee contributions under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred. (See Examples 6 and 7.)

[GBurns]

Rev. Proc 2008-50 seems to deal with a "Brief Exclusion from Elective Deferrals ... " where as the scenario in the OP seems to be a " An employer’s failure to execute an employee’s election .." similar to Situation 2 in the IRS link given by JanetM, and which does not seem to fit a "Brief Exclusion".

[Kevin C]

Sorry, but I think the Rev. Proc. says otherwise. The quote above says for brief exclusions, you are not required to correct the deferrals as provided in section 2.02(1)(a)(ii)(B). That section has two parts. Part (2) is failure to implement a deferral election. You do have to correct the match.

(B) Elective Deferral Failures. ( 1) The appropriate QNEC for the failure to allow an employee to elect and make elective deferrals (including designated Roth contributions) for a portion of the plan year is equal to the missed deferral opportunity which is an amount equal to 50% of the employee's missed deferral. The employee's missed deferral is determined by multiplying the ADP of the employee's group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. In a safe harbor § 401(k) plan, the employee's missed deferral is determined by multiplying 3% (or, if greater, whatever percentage of the participant's compensation which, if contributed as an elective deferral, would have been matched at a rate of 100% or more) by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for earnings. For purposes of correcting other failures under this revenue procedure (including determination of any required matching contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the employee is treated as having made pre-tax elective deferrals equal to the employee's missed deferral for the portion of the year during which the employee was improperly excluded. (See Examples 4 and 5.)

( 2) The appropriate corrective contribution for the plan's failure to implement an employee's election with respect to elective deferrals is equal to the missed deferral opportunity which is an amount equal to 50% of the employee's missed deferral. Corrective contributions are adjusted for earnings. The missed deferral is determined by multiplying the employee's deferral percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a fixed dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a fixed dollar amount to be deferred for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making catch-up contributions divided by 12. The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding three sentences) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for earnings. The requirements relating to the passage of the ADP test before this correction method can be used, as described in Appendix A section .05(5)(d) still apply.