Inclusion of ineligible employee

[Guest Peggy806]

An employer allowed an ineligible employee to make deferrals in 2008. My research shows that the "preferred" method of correction is to forfeit this and make the employee whole outside the plan. Do they change the W-2 for 2008 on this person to show no deferrals or do they increase the W-2 in 2009 when the refund is made to the employee?

[Tom Poje]

Under EPCRS the preferred metod is to put in a corrective amendment making the person eligible.

Appendix B section 2.07(3)

this avoids the question you are asking regarding W-2

[PAL]

What if you can't correct by amending either because the participant is an HCE or there are other employees hired around the same time that were not given the opportunity to defer early?

[Tom Poje]

this is how EPCRS reads:

(3) Early Inclusion of Otherwise Eligible Employee Failure.

(a) Plan Amendment Correction Method.

The Operational Failure of including an otherwise eligible employee in the plan who either (i) has not completed the plan’s minimum age or service requirements, or (ii) has completed the plan’s minimum age or service requirements but became a participant in the plan on a date earlier than the applicable plan entry date, may be corrected by using the plan amendment correction method set forth in this paragraph. The plan is amended retroactively to change the eligibility or entry date provisions to provide for the inclusion of the ineligible employee to reflect the plan’s actual operations. The amendment may change the eligibility or entry date provisions with respect to only those ineligible employees that were wrongly included, and only to those ineligible employees, provided (i) the amendment satisfies § 401(a) at the time it is adopted, (ii) the amendment would have satisfied § 401(a) had the amendment been adopted at the earlier time when it is effective, and (iii) the employees affected by the amendment are predominantly nonhighly compensated employees.

since it says amend to include 'only those ineligible employees wrongly included' I take that to mean it doesn't matter if there were other employees who weren't given a chance, just those that were included.

Note: if the only person wrongly included was an HCE you have some real problems since the amendment is supposed to include predominantly NHCEs. since EPCRS offers no other solution (e.g. simply return the deferrals as if it didn't happen) this could imply you should amend to bring in other NHCEs as well, and since they weren't given a chance to defer, then provide them with a QNEC.