Missed Payroll Contributions

[Guest Ray Corneau]

I have a participant in one of the 401(k) plans that I service who was eligible to participate in the plan on 7/1/2002. The client forgot to take payroll deductions from the participant for three bi-weekly pay periods. Since the plan is on our prototype document, they have "until administratively feasible" to begin deductions, however, they can not rely on this because they did have a reasonable amount of time. The participant also terminated at the end of August. How can the plan correct this defect?

[MWeddell]

Unfortunately, the DOL doesn't have a self-correction program. The official fix is to follow the DOL's Voluntary Fiduciary Correction Program to deposit the deferrals late and investment gains. The IRS won't impose a prohibited transactions excise tax if you follow the DOL procedure.

[austin3515]

See IRS REvenue Procedure 2002-47.

The self correction methodolgy is to make a QNEC on their behalf in an amount equal to the ADP of all other NHCE's, and also a matching contribution in an amount equal to the ACP of NHCE's.

See the procedure for the specifics, but that's generally how it works.

[actuarysmith]

Austin is correct. Go see the "Q&A columns" on the benefitslink.com homepage. Select the "Correcting plan Defects" link.

They discuss the procedures for correcting missed contributions.

[austin3515]

Also, if the amounts were never withheld from the employee's paycheck, I don't think there is any issue with the DOL. The DOL is concerned with amounts withheld and not remitted.

[MWeddell]

Looks like I did answer this question too hastily. I agree with the above post that it depends on the facts. If the money was withheld from the paychecks but not transmitted, the DOL's VFC program is the appropriate method of correction. If the participants elected to defer but money wasn't taken from their paychecks, it still may be an ERISA issue (administering the plan not in compliance with the written document), but the DOL's VFC doesn't cover this and you're probably right to use the appropriate IRS correction program.