"Iffy" correction method used

[Guest yukon]

Standard 401(k) plan.

Eligible HCE elected to defer in 2002, but the Sponsor's payroll department never set up his payroll deductions. This is discovered by RK in early 2003. Together, the RK and Sponsor come up with the following correction method:

1. HCE funds the 2002 deferrals to the plan via personal check; the Sponsor then revises his 2002 W2.

2. Sponsor makes up the match and earnings on the two sources.

The correspondence I have includes references such as "...in accordance with Revenue Ruling 2002-47". Although I think they mean "Revenue Procedure...".

I've researched the Rev Proc but can't find anything that allows this type of correction (ie., making up a deferral with ATAX contribution, then recharacterizing).

Would really like some comments. Thx.

[Harwood]

Deferrals must come out of a paycheck [except for the self-employed].

This method of correction is not acceptable at all.

W-2's and paychecks are based upon constructive receipt. Taxable compensation cannot be changed after-the-fact like this.

[Tom Poje]

see rev proc 2003-44, appendix A .05 Exclusion of eligible ee

...if an ee should have been able to make an elective contribution...employer must make a QNEC....

I'm grabbing that real quick, so maybe it doesn't apply in your case. this might only apply to an ee who was not let into the plan itself, rather than the case where ee was let in but his deferral not taken out.

[jquazza]

You have a nondiscrimination problem if you make a QNEC solely for an HCE.