Failure To Update Change In Elective Deferral

[Guest jmlumpkin]

Can someone verify the appropraite correction method for employers who fail to increase a participant's deferral percentage upon his/her written request?

Please provide references, if possible.

[k man]

this is off the top so hopefully someone will confirm but i dont see that as a qualification issue. the employee would basically be out of luck in my opinion. they could increase their deferrals the rest of the year to make up for the shortage. failure to increase deferrals is probobly nothing more than a ministerial error which would not effect the plans qualification. as far as references you can look at the revenue procedure that deal with correction of plan defects. you can see from the flavor of the rev. proc. that not inreasing deferrals is not the type of error you need to fix.

[stephen]

That has been my experience as well.

[Brian Gallagher]

If the plan had the request for a significant amount of time, I say the plan should provide, via a QNEC, a contribution to the participant equal to the missed deferrals. Significant amount of time meaning it might be detrimental to the participant to make up lost deferrals. She may have asked to move from 2% to 15%, and making thos deferrals up may have to take out 20-25% of a few o paychecks.

Is there an administrative policy in effect that says how a participant may change deferrals and if there are any time constraints, eg once per quarter? And, does it state when the changes will take effect, eg--next payroll, first payroll of next month, within two or three payrolls?

[401 Chaos]

As a general rule, I agree with Brian that the employer should try and find some way to correct this error rather than telling the employee tough luck, particularly if the error went unnoticed for an extended period or involved a significant amount. The employer's failure to make the requested change is presumably a failure to operate the plan in accordance with its terms and thus an operational error which could potentially result in disqualification. The bigger issues, though, are the ill feelings of the affected participant. I believe there is a rule (sorry I do not have a cite but it may be discussed in Rev. Proc. 2003-44 section on corrections for excluded employees) that basically says you do not have to correct the exclusion of an eligible employee if the excluded employee is brought into the plan in time to participate for at least 9 out of the 12 months. If exclusion goes beyond 3 months, however, it seems the Plan definitely needs to correct for the excluded amounts.

It seems the correction here might be easily handled using the same general excluded employee correction principles set forth under 2003-44 by making a QNEC to the participant's account for the missing deferral percentage, as adjusted for earnings. (Both the missing percentage and earnings amounts should be very easy to calculate.) It also seems to me this error could be classified as an insignificant operational error if limited to one isolated case and thus could be self-corrected at any point without requiring IRS approval.

[oriecat]

She may have asked to move from 2% to 15%, and making thos deferrals up may have to take out 20-25% of a few o paychecks.

I'm just curious about where the participants responsibility lies in this. In such a change as you stated above, the change should be very obvious on the paycheck net amount, and it seems to me that the first check where the change wasn't made, the ee should contact the employer about it to correct the situation. (And I wouldn't think a one check delay should then be a problem?) If the ee is negligent in noticing the amount on their check and reporting it, why should the er have to fork out their own money to cover the ee's missed deferrals?

[E as in ERISA]

I've heard the IRS say that the participant has a responsibility to notice at some point -- but they also joked that they don't like to look at their own paychecks -- so they don't expect others to look at every one of theirs. I can't remember what time frame they suggested. I think that it was reasonable -- I don't think that it was longer than a quarter.

[k man]

i think it is an error as to amount, not participation. i believe the participant was allowed to defer, just not as much as they would have liked. as to the comment on operational error resulting in disqual, i do not believe that is correct. unless the plan provides rules pertaining to increasing deferrals in the actual plan document, the employer would not be violating the plan doc but rather an adminstrative policy. this can not result in disqualification.

[401 Chaos]

K Man,

I agree that this is an error in amount and not participation. And I will also admit that you may be correct that such an error may not run afoul of the plan provisions. Also, as a practical matter, I think the risk of disqualification, if applicable, is so remote as to be almost moot. However, I am not comfortable saying that just because a plan document does not expressly set out the deferral / change procedures in detail that there would not be an operational error. Are you saying a plan can neglect (or even refuse) participants' deferral elections (or changes to existing deferrals) without any consequence? ("Hi gang, I'm afraid we are just now getting around to processing those election changes you submitted at the beginning of the year. Sorry. If some of you had complained sooner, we might have looked into it sooner. Oh well, Tough luck." If you take that to the extreme, doesn't that basically mean an employer could refuse to ever honor a participant's election changes without any consequences?)

As to the posts noting participants' responsibility to notice a failure to implement deferral changes, I think this is a fair point, particularly where the change would result in a significant (and thus obvious) change in pay but as a general rule I still think the Plan needs to correct such errors. I have no real authority for this except that it is the right thing for the plan to do where the Plan has screwed up. Just because the participant may not be as on the ball as we would like and may not alert the plan to the failure to make the change seems to me to just be blaming others for our own mistakes. As my mother always said, two wrongs don't make a right.

[E as in ERISA]

If I recall correctly (though I'm not sure I am), the IRS' suggestion was that the employer would make up the contributions for a limited period of time only.

[Guest mmc]

I believe that the corrrection is to make a QNEC for the amount of the deferrals and also contribute any matching contributions and make a reasonable calculation of lost earnings.

[mschwechter]

The IRS's view on loan payments not starting is that it is the employees responsibility to know what is going on with his paycheck, and take appropriate steps to insure that the payments start and are withheld on time. I would suggest this also applies to employee deferrals. If the employee increased their withholding election, and their net check did not decrease, this should be a red flag. Even if an hourly employee, they are sure to point out if they did not get paid for the correct number of hours (of course they will only point this out if shorted, not if over). I think the employee is responsible to make sure the change took place, and should not be rewarded for their failure to do so.