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I say yes, you have to limit the correction to the 402(g) limit. If the participant has contributed the maximum for the year, how can there be a missed deferral or missed opportunity?

Are you sure? Just because the number of affected employees is less than 20% does not make it not a partial plan termination. It's always a facts and circumstances determination. An employer-initiated mass termination is usually indicative of a partial plan termination.

I like that - a very civilized way of saying it. Nicely put!

Even without the mistaken withholding instruction you describe, an employer/administrator often might encounter the problem of lacking enough pay for all the things an employee might do with it. For example, consider a paymaster who must withhold for FICA taxes, three income taxes (Federal, State, and city or county), two or more unemployment and disability taxes, and might apply salary reductions for the employee’s portion for health coverage, a health flexible spending account, a dependent-care account, and a 401(k)/403(b)/457(b) elective deferral. Some employers develop an internal hierarchy—sometimes written, often not—to sort out these and other competing demands on an employee’s pay. Most concur that withholding taxes comes before any of the health, other welfare, and retirement benefits. And within employee benefits, most prioritize maintaining health coverage over voluntary retirement savings. While I’ve never seen the Treasury or its IRS publish anything on this point, it should be unseemly for the IRS to assert as a tax-disqualifying operational defect an employer/administrator’s failure to apply perfectly an employee’s elective-deferral election if the reason was properly withholding taxes, especially any Federal tax. About coordinating wage reductions across the many employee benefits and providing it in or under the plans’ governing documents, that’s possible when one law firm works on all plans of the employer. It’s hard to do using IRS-preapproved and other documents that come from the plans’ service providers. And even employers that use custom documents for all or most of the plans often don’t want to pay for the time it would take to do this right.

Thanks. I agree that in my latter example (participant has already deferred the limit, then a corrective QNEC is made) the QNEC itself would be capped by the 402(g) limit. In the former example (a corrective QNEC is made, then the participant starts deferring) it would be capping the participant's elective deferrals, not the QNEC. Nothing in EPCRS squarely addresses that situation. In that case, would you tell the participant they can only defer up to the 402(g) limit less the QNEC amount, even though those are two different money sources?