Employer accidentally stopped participant 401(k) contributions and mat

[Guest geslack]

An employer stopped payroll deferrals for several months for an individual. No deferrals - no match. After the end of the plan year, he complained. What's the remedy? Have the employer deposit equivalent deferral and match money, just match money, or say sorry - won't happen again.

[Alan Simpson]

Check the plan document, most of them include information on what to do when there is an omission of an eligible employee. I think it would be safe to assume you could use the same procedures for this instance.

[LCARUSI]

If the document addresses this issue, then I guess you should follow the document. However, in my experience, I've not seen such specific language in the Plan.

I would argue that the employee implicitly agreed to a suspension of contributions by not bringing it to the attention of the employer when he or she received their paychecks.

The employer might counsel the employee to increase contrib rate this year to make up for lost contributions last year.

If the employee lost a matching contrib which will not be recovered with a higher contrib rate this year, the employer can offer the employee a payment outside of the plan to make up for the loss. (Dangerous precedent!)

And I suspect many people will disagree with me and say it's the employer's responsibility to correct its error and make the plan whole by contributing the missed deferrals and match to the plan on behalf of the employee.

[Guest gpr]

LCarusi: How could the employer make up the prior year's missed deferrals unless the employee pays them back and has his prior W-2 adjusted, (assuming they are trying to do this on a retro basis)? (And, therefore, his prior 1040.)

[Guest shafter]

Yes, this is an old thread, however, we have just had the issue come up. We are inclined to apply Rev Proc 2000-16, but use the actual percentage on the enrollment form and not as calculated by a QNEC to determine the amount to be paid by the employer. Any opinions?

[R. Butler]

I agree with Shafter, except I may try to give the employee the lesser of the Rev. Proc. 2000-16 remedy and the actual percentage on the enrollment form.

[Alf]

Your method is better at putting the participant and the plan in the same position they would have been in had the error not occurred. Revenue Procedure 2000-16 specifically addresses the situation where participants were excluded from participation, therefore the employer won't have an election form for these employees and the average ADP/ACP for that employee's group has to be used. In your case, you know what the employee elected and you should use that.