Self-correction for exclusion from elective deferrals-ADP

[Guest TinaThornton]

Employer failed to make elective deferrals for exmployees for one payroll period in August '05 for a limited number of employees who had be laid off and were receiving unused vacation pay and severance payments in the same check. We have determined that we qualify for self-correction under the IRS correction procedures. We don't qualify for the self-correction exception because the employees will not have 9 months to "make up" the contributions (because we are so late in the year and the employees have been laid off). The employer would like to make the correction ASAP. My understanding of the correction procedures is that the employer makes a contribution on behalf of these employees based on the ADP for the group, either HCE or NHCE. My question is can the employer use the ADP for the non-highly compensated group from the last plan year instead of waiting until the ADP for this plan year is calculated sometime early next year?

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The correction method you are proposing is for if the plan failed to include an eligible employee. It sounds like in this situation the employer failed to follow the participants' direction of what was to be deferred. This specific problem is not addressed in the EPCRS. At the ABA Tax Section Committee meeting with the IRS and Treasury earlier this year, this same question was posed. They responded that if an employee makes an election, the employer has to correct the error by putting the participant in the same position had the error not occurred.