New participants not allowed to defer - new rule?

[Guest MikeD]

I may have completely missed this, but did a new rule come out on what contribution must be made for a Plan participant who is not given the chance to defer when he/she becomes eligible to participate in the Plan? (I know the old rule was that the employer had to contribute the average percent for the NHCEs - however, someone just mentioned a 30% rule?) Thanks.

[Guest BJ]

The following is from an article published by Thompson Publishing Group in November 2004:

"At a recent meeting with benefits practitioners, IRS officials previewed several changes to the Employee Plans Compliance Resolution System (EPCRS), which was most recently updated slightly over one year ago.

The most significant of these prospective changes shows how to correct a plan’s failure to let an eligible employee participate in a 401(k) plan. The current version of EPCRS, which is set forth in Rev. Proc. 2003-44, indicates that such an employee should receive a replacement contribution equal to the plan’s average deferral percentage (ADP) for the year or years involved, multiplied by the participant’s compensation. A replacement matching contribution should also be provided, calculated at the plan’s average contribution percentage (ACP) rate. The correction guidance reflects the IRS’s practice in addressing this type of issue. However, this practice has been criticized as providing a windfall to the affected participant.

After studying this issue further, the IRS officials predict that the new revenue procedure will allow an alternative correction in which the amount to replace the deferral opportunity lost to the participant will be 30 percent of the amount under current guidance. The 30-percent figure was arrived at as an estimate of the economic harm such an individual would have suffered as a result of the lost deferral opportunity, mostly as a result of a lost tax deferral opportunity.

The new 30-percent method will be optional, and plan sponsors can still use the traditional correction method. Also, IRS officials indicated that the 30-percent method will apply only to the contribution that replaces the deferrals; the full amount of correction will still be required for matching contributions.

............

IRS officials estimate that this new procedure would be released sometime during January of 2005."