Exclusion of Eligible Employee

[Guest jefe96]

An employee completed a salary reduction agreement and enrollment form in 2004. Nothing was ever withheld for this person though. He just noticed this year, 2 years after the fact. In reading the regs it appears that this can be corrected through SCP, right? The plan is a safe harbor plan with enhanced match so there is no ADP test. So, should he be restored using the actual % that he indicated on his enrollment forms? Or do we have to figure out what the ADP was for the lower group (he's NHCE) for the years in question. Also, are the earnings calculated using the same provisions as under the lost earnings for missed deferrals (i.e. DOL calculator under VFCP)? Or do you need to make up earnings based on the actual investments that the participant chose?

Thanks.

[Just Me]

You need to refer to Rev. Proc. 2006-27 (EPCRS). However, it is not clear in the Rev. Proc. what to do when the employee has entered into a valid salary deferral agreement but was overlooked. In working with the IRS on this issue, we understand their position to be that the salary deferrel agreement needs to be honored in full if you are correcting under SCP. You MIGHT be able to pursuade the IRS to go with a 50% correction if you file under VCP. I would not self-correct for anything less than the full amount as elected in the employee's agreement. EPCRS also sets forth examples of acceptable lost earnings calculations. I also understand that the IRS doesn't "buy" the DOL rates that you mentioned because they may not reflect what the amount would have actually earned under the plan based on its investment mix.