Bonus Deferral Error

[DTH]

There have been many postings on this type of error, but I am wondering what experiences folks have had under Revenue Procedure 2006-27.

401(k) plan does not exclude bonuses from the definition of compensation. The plan also does not have a separate deferral election on bonuses (deferrals from bonus is the same as for salary). The plan did not take deferrals from the bonus payments in January of 2007.

There is no safe harbor correction in EPCRS for this problem. Do you use the general correction principles and the employer will make a QNEC on the bonus based on the participant's deferral election at the time of the error? Or do they make a QNEC based on the missed opportunity safe harbor under Section 2.02 of Appendix B? They cannot use the partial year correction because the error did not surface until April (calendar plan year).

The employer matches on a payroll basis, so they will need to definitley give a contribution for the missed match based on the match formula when the error occurred. But since this is at the beginning of the plan year, do they need to do a QNEC for the missed match or can they just make a regular match subject to the vesting schedule?

Thanks!

[Guest mjb]

If the employees executed valid election to defer they had not legal right to receive the bonus so the employer should ask them to return the AT amount paid and the employer can forward the bonus amount to the plan with the amount witheld for taxes adjust their future withholding.

[401_4_ever]

In my opinion that solution is not anywhere within the spirit of EPCRS and I would love to see a single cite that supports it. Section 2.02 of 2006-27 includes partial year exclusions of an eligible employee under the corrections method of 50% of the participant's ADP rate. If there are 9 months or more during the plan year left for the employee to increase their deferrals, it indicates no correction is needed.

Additionally, it is illegal in some states for an employer to require an employee to pay back compensation paid to them. This is particularly true when the money has already been through payroll.

[DTH]

The error surfaced in April so there are only 8 months left in the plan year, so the 9 month rule would not apply.

To the extent that participants who had a deferral election on file and the employer did not take deferrals from the bonus payment, there is an operational defect.

The question is:

Do only the correction principles apply under Section 6, where you would restore the plan to a position it would have been in had the erorr never occurrred? Here the employer makes a full QNEC on the amount that should have been deferred based on participant deferral elections.

OR

Can they use Appendix B, Section 2.02, Exclusion of Otherwise Eligible Employees, "missed deferral opportunity" where the QNEC would be 50% of the ADP for the representative group?

Thanks.