Deferral election change applied to wrong participant. How to correct?

[Guest oxdougw]

Participant "A" and "B" have the same last name. "A" wanted to raise his deferral percentage from 2% to 5% 7/1/04 to take full advantage of the $1 for $1 on first 5% match. Apparently he never noticed that his deduction changed on his paycheck. The change was inadvertantly applied to "B" whose deferral % was lowered from 6% to 5%. He also never mentioned the error to HR.

I haven't found any examples of this type of situation or suggested corrections. Has anyone run into this situation and how to fix it? It doesn't appear to be a qualification problem from what we see.

[QDROphile]

It is a qualification problem. The plan says that contributions will be made in accordance with participant elections. You have contributions for two participants that are not what they elected. The plan did not operate in accordance with its terms.

Rev. Proc 2003-44 provides guidance on how to fix mistaken excesses and shortfalls of contributions.

[Guest oxdougw]

I've read 2003-44. The only error addressed is when an eligible is not given the opportunity to enter the plan and make deferrals. My folks were deferring but not necessarily at the rate they would've like to based on there enrollment forms.

Keep in mind, they should've seen the error on their pay stub.

[QDROphile]

You are correct. Rev. Proc. does not specifically identify your particular circumstances and walk you through the correction step by step. It does that with a few common errors. However, it provides general guidance about corrections and examples about matters such as earnings adjustments when the participant got too little contribution or too much contribution. In your case, you have two participants who received too little contibution. The overall guiding principle is that the participants and the plan should be restored to their positions as if the mistake had not ocurred. It looks like the employer may have to kick in some dollars unless the participants agree to elect contributions for the remainder of the year to get where they are supposed to be. Then there are those pesky earnings to account for.

The question about the effect of the participant's fault in the matter is an interesting one and there are some other threads on this board that discuss the issue. Don't expect the situations to match yours exactly, or to provide an answer. I doubt that the failure of the participants to observe the problem for some reasonable time would not make a difference to the IRS. The employer will be responsible for the correction.

An update of Rev. Proce 2003-44 is expected. It may provide some guidance that is more on point for you.

[Guest oxdougw]

Thanks for your comments. It appeared to me that some make-up match needed to be kicked in but failed to find guidance that match this set of circumstances.