Omitted employee's contribution for last year and 8 months. How do we handle this?

[Guest Dave Flora]

This may seem like a fairly elementary question, but this is the first time I've ever had to deal with anything like this. We just found out that for the last year and 8 months an employee who was supposed to have 10% of his pay contributed to our 401(k) was accidentally omitted from our system. How do we deal with this issue? Most places I've read seem to point to the fact that we basically have to fund the money we didn't take out of his pay into his 401(k) account (approx $6,000). I would assume that we would at least have to have our trustee calculate what he would have earned on that money over the life of the term had it been invested and we would have to pay that, but would we truly have to pay his entire nondeducted contributions? It amazes me that this employee never noticed that 10% of his pay wasn't deducted every paycheck. I know this is our fault that someone didn't enter his information correctly in our payroll system, but does any responsibility fall on the employee? In essence, if we have to pay back the contributions the employee would be getting a $6,000 bonus, and that doesn't seem right. Does anyone have any advice as to what we shoud do to correct this problem? Thanks!

[Guest texasactuary]

Rev Proc 2003-44 gives several examples about self correction (I am assuming that you are ok to self-correct). There is an example regarding the failure to allow EEs to defer whic provides that the ER put in the deferrals equal to the ADP of the NHCEs plus gains and match (if applicable). This is the closest to your situation.

I have had the exact same situation and the correction was that the ER put in the % that the participant had elected with gains and applicable match. Nice bonus as you put it.

[david rigby]

click here, scroll down to find Rev. Ruling 2003-44.

http://www.benefitslink.com/IRS/index_short.html

[stephen]

Pax,

Rev Ruling 2003-44 does not seem to be included in this listing. The list jumps from 2003-43 to 2003-46.

[TBob]

I think you are looking for Rev. Proc. rather than Rev. Ruling. 2003-44

[david rigby]

Oops. Correct.

[Brian Gallagher]

I thouhgt there was something like a statue of limitations for something like this. I know it's both the plan's and the participant's responibility to make sure the proper deductions are made.

But if you do the correction, this is how it is GENERALLY done:

Make up the contributions and any match plus earnings and put into a QNEC type bucket in the account (meaning both contribs + earnings are 100% vested immediately).

I would have the company consult an attorney versed in ERISA matters.

[mbozek]

Why is this an operational failure of the plan instead of the failure of the employer to withhold funds from the employee's pay outside of the plan? The employee is not entitled to be enriched by 6k at the expense of the plan sponsor. Section 6.01(5) of the EPCRS procedure provides that correction is not required if it would be unreasonable. The plan can self correct for 04 contributions which were not withheld by having the ee remit $2400 reduced for FICA to the employer for contribution to the plan and the employer will reduce the employees taxable income by a equivalent amt since the employee had no claim of right to the money which should have been deferred under the salary reducton agreement. Rev. Rul 79-311. Alternatively the employee could increase deferrals for the rest of 04 by an additional $600 a month. The ee has responsibility for not checking his pay stubs for 03 and informing the employer that deferrals were not made.

[RCK]

I know that there are sponsors who put disclaimers in their communications, saying something like they will only be responsible for up to 3 months or 6 months of corrected deferrals nor allocations, if the participant got statements that showed the incorrect information.

My question is whether anyone has successfully applied this defense in a self correction situation.

RCK