Payroll did not withhold the correct %

[KateSmithPA]

I just had a call from a client. One of their plan participants changed their salary deferral election from 5% to 10% in 1999. The person who does the payroll never made the adjustment. Suddenly the participant has noticed this error - almost 2 years later - and thinks he should receive a matching contribution on the missing salary deferral contributions. I guess I believe that even though the company obviously made a mistake, the participant has some responsibility to pay attention to what is being withheld from his paycheck. Does anyone have an idea of whether or not the employer has to do anything to make up for this error?

[Moe Howard]

Yes, I know what the employer has to do. It has to correct its error.

The error which you describe is referred to in IRS Rev Procedure 98-92, as a "insignificant operational failure". The employer is required to correct the error by contributing additional funds to the participant's account now. The contribution must take into account both the neglected match $amount (over the neglected years) and also the $earnings that those neglected matches would have earned for the participant. This required method of error correction is known as "self-correction, under the IRS's Administrative Policy of Self-Correction".

The error you describe (although small) is an operational failure, which could disqualify the entire plan (if not corrected timely by the employer) .... because it shows that the plan is not being operated in accordance with its terms.

The participant has no responsibility to catch the payroll department's error. The employer has the responsibility to correct the error as explained above.