Proposed method of correcting an operational failure would create an a

[Guest Letocha]

Due to a computer system error, neither an elective deferral nor a corresponding matching contribution was made for a 401(k) plan participant who had chosen to make a 1% elective deferral. The employer caught the error within a few months and would like to correct the problem. The employer has determined that a corrective contribution that would be based on the employee's selection of a 1% elective deferral (and the corresponding match) and that would be adjusted for earnings would cause the employee to (barely) exceed the 415 limit; if the corrective contribution were to be made without the adjustment for earnings, however, the 415 limit would not be exceeded.

(1) Disregarding for the moment the issue of the earnings, is it correct to base a correction on the elective deferral percentage selected by the employee?

(2) If the correction should be based on the elective deferral percentage selected by the employee, should earnings be credited or not? On one hand is the need to fully correct the violation; on the other is the risk that a "full" correction would create another operational failure. If earnings are credited, the 415 limit will be exceeded, and, based on .08 of Appendix A of Rev. Proc. 2001-17, the remedy would be to place the portion of the excess attributable to the match in a suspense account and to distribute the portion of the excess attributable to employee deferrals. Section 6.02(2)(d) of Rev. Proc. 2001-17 states that "the correction method should not violate another applicable specific requirement of section 401(a)," and this proposed correction arguably would violate Code section 401(a)(16). That same section of the Rev. Proc. goes on to state, however, that any additional failures created as a result of the use of an EPCRS correction method should also be corrected under the Rev. Proc.

[Guest rhp]

I don't think the earnings credited are counted as an annual addition. And it is reasonable to me to use the employee's elected deferral percentage to determine the amount the employer must make up.

[david rigby]

At the risk of saying something stupid, the 415 issue might need another perspective. If the correction of such a small percent (with imputed earnings) causes a 415 problem, there must also be another plan. What do the two (or more) plans say about co-ordinating with each other with respect to the 415 limit? (I'm not sure this is even relevant; any comments?)