Deferrals Not Withheld From Pay

[Guest ERead]

I would agree with LCARUSI - it's not entirely the employer's fault.

You are correct with the issue of taxable income. Unless it's done with income from this year it can't count. As for the deferrals, your option is limited by the Document language. Don't simply allow that participant to increase at any point. You'll need to adhear to the language or you may create other problems.

Good luck....

[LCARUSI]

I disagree with EREAD (a little).

Let's say the plan has a contribution limit of 15%. I believe it would be permissable for the employee to contribute at a rate greater than 15% between now and the end of the year to correct the error. Remember, if this happens, the participant's aggregate contribution rate for the year will still be under 15%.

[Alonzo]

The employer failed to process a deferral change election, and, as a result, did not take enough deferrals from a participant's pay. The participant did not notice, and several months have gone by.

The employer has now noticed, told the employee about the problem, and has given the employee the opportunity to write the trust a check to make up for the missed deferrals. However, the employee doesn't have the cash to write the check right now, and wants to pay the planl next year. Of course, he wants to the contribution to count for this year for taxable income and matching contribution purposes. (Fat chance on the taxable income issue -- the guy doesn't get an end of year bonus)

What have you guys been doing in similar situations? I'm particularly worried about the employer being forced to correct its mistake by doing a QNC, because that seems to be the Rev. Proc. 98-22 approved method.

[LCARUSI]

First of all, I don't think the Employer should give the employee the option of writing a check to the Plan. Contributions are by salary deferral only.

The Employer should give the employee the right to have increased salary deductions between now and the end of the year so that the deferrals for the year will be what they would have been if the contrib rate change had gone through properly.

This is not entirely the employer's fault. The employee should have brought it to his employer's attention immediately when he or she realized the contrib rate had not been changed as requested.

[Guest ERead]

I think that I would agree and disagree. I think that under normal circumstances, you would have a problem, if the document didn't allow for changes on a, say, monthly basis or per payroll.

However for purposes of this discussion we are already talking to some extent about self-correction. If the client documented the conversations and proceeded to allow the participant to contribute at the higher rate, only as a means to make them whole for the error previously, then I think you could say it was done on APRSC.

Further comments?

[Alonzo]

Thanks for your comments. The Plan language would allow for a 15% contribution for the plan year, even if the contribution were 18% of current pay. (I wrote the language in question.) It would not allow for the participant to write a check.

I called the Internal Revenue Service Employee Plans Taxpayer Questions line regarding the situation. The agent indicated that giving the participant the chance to make up the contributions that weren't taken out of his check was "probably" all the action the employer needed to take. However, he indicated that this sort of situation was a "grey area" under Rev Proc. 98-22. The absolute safe thing would be for the employer to go ahead and make up the contribution, by making a QNC. In similar VCR situations, the agent had seen the IRS accept the election approach on some occasions, and mandate the QNCs on others.

Since the correction would be one subject to APRSC, we agreed that it the employer were audited, it would be the IRS auditor who made the final call on whether giving the employee the election was sufficient.

[Guest PWBAer]

Wow, what a great response so far to this question.

It's been my experience that the employee CANNOT write a check to the Plan since participant contributions to a 401(k) Plan are salary deferral only...and let's not forget that technically, employee deferrals are EMPLOYER contributions.

Now, the Employer goofed. Guess what, they make a QNEC to the Plan in the amount that would have been withheld. Cannot believe that IRS agent would say the participant could be expected/allowed to make-up contribution.

Regarding maximum deferral amounts, if 15% is maximum deferred then that's the maximum at any point in time...not just when the average is calculated at the end of the Plan year. However, don't know too many IRS agents who are going to review any Plan that deeply. Thus, for practical purposes, I'd permit participant to defer in excess of 15% if, at the end of the year, the maximum would be no more than that. It'd be sheer luck for IRS agent to discover the contribution rate during the Plan year in an amount that's above what's permitted by the document. They want to get the job done and go home just like the rest of us.

[Guest KFLETT]

Based on this subject, what if it was now the next plan year? Can the same solution be applied? Will it be necessary to "correct" the prior year trust accounting and amend the 5500?