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if the PS total was a specific dollar amount, say $100,000, then not only did some people get too much (because fringe was not excluded from pay), but others were shortchanged because it was a zero-sum error. If you have HCEs predominantly in the windfall group (the ones most likely with fringe benefits) but not the shortchanged group then the error was also discriminatory, which probably takes 11-g away. Agree with KC in terms of either 1) re-allocating the contribution amount correctly or 2) contributing additional amounts to the shortchanged group to make them equal. However, that could be problematic because when you look at the percentage of plan comp (fringe excluded), it could be different for many of the participants - so to what percentage do you equalize?

You need to do something to get her to escalate the issue to somebody who knows what they are doing. See Belgareth's post. Perhaps a response something like the following: "Thank you for your email. I would like to formally request that you take a different action than what you have proposed. Instead, I would like to suggest that you not withhold any more until my new 20% election makes up for the amount that was overwithheld. That is, until such time as 20% of my pay under the new election equals the amount that was overwithheld, nothing further will be withheld. Please consider this request as a formal claim for benefits under the Plan." Optionally, you could include a numerical example, but that might be overkill at this point.

I believe that you can avoid VCP. Rev. Proc. 2017-1 merely says that the written plan must have been“intended to satisfy the §403(b) requirements.” It does not say the written plan document must have been intended to satisfy the requirements of either the regulations or Announcement 2009-89. Since the plan you've got was a written plan document (which is all that either the regulations or Announcement 2009-89 would have required, anyway), it should satisfy the requirements. And that makes perfect sense. Both the regulations and Announcement 2009-89 were intended to interpret the 403(b) requirements. However, they were made prospective only, to reflect the fact that employers may not have realized before 2009 that 403(b) should be interpreted so as to require a written plan document. To the extent that employers did interpret 403(b) as requiring a written plan document before 2009, and complied before the regulations and the Announcement came out, they should not be penalized for doing what was necessary even earlier than the IRS would have required it.

She may be worried that this is considered earned income and she is limited or it reduces her SS. We know that's not the case, but she may not.

I can see them saying they won't withhold any more until your new 20% election is used up - for example, salary during the error period was 50,000 - they should have withheld 3,000, but instead they withheld 6,000. So there is a 3,000 excess. Now your new election is 20%. Until such time as 20% of your pay under the new election equals 3,000, they don't withhold anything. That seems like a reasonable and appropriate correction. It does not seem reasonable to refuse to honor your new 20% election until the "correction" is made based upon an ONGOING 6% assumption, even though you have elected a new percentage. As alluded to above, I would push this, and ask for a WRITTEN explanation.