Must deferrals be stopped if a loan is taken?

[Guest Miller426]

Unfortunately I did not notice it right away and I have missed out on three or four contributions. I received a loan on 7/31 and am now being told my deferrals stopped automatically because it forbidden under federal regulations to continue deferrals while I have a loan.

I am not aware of any such regulations and have asked the plan administrator to provide them.

In the event no such regulations exist, can anything be done to make my account whole?

[jkdoll2]

You usually only stop deferrals if you take a hardship - not a loan. Have the plan administrator give you a copy of the loan policy and see if anything is stated in there.

[PJ2009]

You may be thinking of a hardship distribution, which often requires that elective deferrals be suspended for a period of time. However, the loan policy or plan document may require that elective deferrals be suspended, but this is not a legal requirement. You should request a copy of your SPD, plan document, and plan loan policy.

[Guest Miller426]

I have the SPD and Loan Policy and neither indicate that deferrals will be automatically stopped upon taking a loan.

What can be done to make my account whole? I was reading another thread regarding missed deferrals (late deposits) and there was mention of a QNEC going through EPCRS. There was also mention of a correction being made through SCP or VCP. There was also a reply if qualifiying there is a special rule for brief exclusions in Rev. Proc. 2008-50, Appendix B, Section 2.02. The missed match gets deposited but you don't have to correct the deferrals.

Is anyone familiar with these options and able to explain them and how they differ without industry jargon?

[david rigby]

I have the SPD and Loan Policy and neither indicate that deferrals will be automatically stopped upon taking a loan. What can be done to make my account whole?

Ask the plan administrator why your deductions stopped if it's not in the loan policy?

[masteff]

Follow David's suggestion above. Also ask them to show you what they have that says Federal law requires deferrals stop while a loan is outstanding. You probably should also ask them to verify that they processed it as a loan and not a withdrawal.

What can be done to make my account whole? I was reading another thread regarding missed deferrals (late deposits) and there was mention of a QNEC going through EPCRS. There was also mention of a correction being made through SCP or VCP. There was also a reply if qualifiying there is a special rule for brief exclusions in Rev. Proc. 2008-50, Appendix B, Section 2.02. The missed match gets deposited but you don't have to correct the deferrals.

Is anyone familiar with these options and able to explain them and how they differ without industry jargon?

Your situation is a long way from being to the degree of correction that you're asking about (and that info applies a slightly different aspect to boot).

[Guest Miller426]

It was processed as a loan. Loan repayments are being taken from pay. There is also a loan balance in my account.

I have requested the regulations be provided to me by the plan administrator but have not yet heard back.

In trying to figure this out for myself it looks like I should be entitled to a QNEC equal to 50% of the amount I would have otherwise deferred and 100% of the Safe Harbor match I would have received, adjusted for earnings.

Based on masteff's post perhaps this is not the case.

In the event I am entitled to this, am I still able to increase my deferrals to make up for the other 50% that would have been in my account? I would not receive any additional match based on this increase since the match is made each payroll period, even though the revised safe harbor notice says it is annual.

[masteff]

In trying to figure this out for myself it looks like I should be entitled to a QNEC equal to 50% of the amount I would have otherwise deferred and 100% of the Safe Harbor match I would have received, adjusted for earnings.

Based on masteff's post perhaps this is not the case.

You're way off base talking about QNECs. You'll make the situation worse if you go in asking for the wrong solution rather than simply seeing what they propose. You do want to insist that it be fixed, but don't try to insist on "how". You really need to give enough time for your plan administrator to understand the error they apparently have made and to figure out how to fix it. If they come to you w/ a solution that doesn't put you in the same place as you should have been (ie you're allowed to make the missed deferrals and they correct any missed matching), then come back and post to us what they've said.

[Guest Miller426]

How am I way off base? The amount that is not now in my account that should be is nearly $1000.

[BG5150]

How am I way off base? The amount that is not now in my account that should be is nearly $1000.

You can have the money deducted now, if you are still in the same plan year. You may or may not want to investigate whether or not earnings should be applied tot he missed contributions.

[K2retire]

How am I way off base? The amount that is not now in my account that should be is nearly $1000.

If you look more closely, I believe the QNEC that you mention applies to a situation where the missed deferral opportunity was for an entire plan year, not a few months.

[Guest Miller426]

(ii) Expansion of Correction Method to

Partial Year Exclusion. (A) In General.

The correction method in Appendix A,

section .05 is expanded to cover an employee

who was improperly excluded from

electing and making elective deferrals

(including designated Roth contributions)

or after-tax employee contributions for a

portion of a plan year or from receiving

matching contributions (on either elective

deferrals or after-tax employee contributions)

for a portion of a plan year.

What am I missing?

There aren't 9 months left in the plan year so I don't see how the brief exclusion applies.

[david rigby]

Instead of looking for retribution, why not go to your ER today(!) and increase your deductions. If/when they tell you "no", then you politley point out the error, and restate the amount/percent you want deducted from each paycheck. Move forward, not backward. Just a suggestion.

[Guest Miller426]

I totally disagree that asking for a correction is retribution. I am not an a$$hole trying to put it to the man or trying to get the plan disqualified. I didn't come here asking how I can take the plan down. I came here asking how my account could be made whole. I am a plan participant denied the ability to make deferrals presumably by an honest mistake who is looking for a fair correction to the error.

[jkdoll2]

I totally disagree that asking for a correction is retribution. I am not an a$$hole trying to put it to the man or trying to get the plan disqualified. I didn't come here asking how I can take the plan down. I came here asking how my account could be made whole. I am a plan participant denied the ability to make deferrals presumably by an honest mistake who is looking for a fair correction to the error.

Can you not talk to the HR person about the error? They may be able to correct it for you if you tell them the problem, and work it out internally. See what they say about how they would plan on correcting this. Take the loan policy with you and show them it does not say deferrals should be stopped.

[Guest Miller426]

I am working with HR. I came here to ask about what options there were to make my account whole in order to educate myself, not ever having been in this situtation before. Thanks all for the information you provided.

[masteff]

You'll make the situation worse if you go in asking for the wrong solution rather than simply seeing what they propose.

Don't focus on how they should fix it. Focus on the outcome. The outcome is that:

1) you are allowed to make all the deferrals you missed because of their mistake, and

2) you receive any matching contributions you should have on those deferrals.

And frankly, if you can just raise your deferral rate for the rest of the year and come out the same, the matching is the real issue. Of course they first have to realize their mistake.

[Tom Poje]

and remember, the HR person doesn't 'run' the plan - there is someone out there (like us) who actually handles the compliance end of things. Taking what you have pointed out so far, the HR person should be in contact with that person as well- (hopefully their response/solution would be along similar lines to what advice has been given here)

good luck on the resolution.

[Guest Miller426]

Thanks. Part of the problem is I can't afford to make up the entire amount of the missed deferrals with only 7 pay periods left. Again thank you all. I have requested this thread be closed.

[Mike Preston]

I see no reason to close the thread. If somebody wants to chime in with their opinion as to the best way for you to proceed (or somebody in similar circumstances) then there is no reason why they shouldn't be able to.

Threads are closed very, very infrequently around here.

By the way, one of the reasons why you may not be getting the support you are looking for is that there are many that view the correction method for missed opportunity to defer in a 401(k) plan as a sort of windfall for the employee. I think it goes something like this: you noticed that deferrals weren't being taken out, so what did you do with the money? Did you put it away for safe keeping so that you could make up the amount missed once the opportunity to defer presented itself again? There are some that think if you spent that money (that you wouldn't have had) and now claim that you "can't afford" to make up the missed deferrals, isn't that a sort of double dipping?

I'm not saying this necessarily applies to you, and even if it does, I'm not saying that the employer shouldn't try to ensure you are made whole.

As others have said, try to work with HR and let them know that you are willing to work with them to construct a fair solution, you may be surprised to learn that what you have read about turns out to be exactly what they propose, but it may take quite a while to have all the outside advisors in the loop convince the internal decision makers as to how to go about it. Keep in mind that you may not be the only person in this category. Also, keep in mind that it is the Plan Administrator's decision as to whether it makes sense to apply one or more correction methods and they can make that determination in conjunction with the IRS. In any given circumstance, the correction may turn out to be significantly different from the correction method you posted.

Good luck and let us know how things work out by posting back to this thread (which you couldn't do if the thread was closed).

[Guest Miller426]

As soon as I noticed I contacted HR. Yes I am partly to blame because my budget is managed by the I know roughly how much I have to spend let's call the bank and double check the balance before I spend any more method rather than by keeping a tight check register. So I didn't know deferrals had stopped until I opened my pay stub, which is something else I rarely do. I would imagine that is the reason behind the 50% of deferrals solution. The employer and the EE take equal responsibility for the error.

Regarding my personal recordkeeping I am not soliciting any advice. Please don't provide any. This event has shown me the benefits of better recordkeeping and I will be making amends.

[Guest Miller426]

When this began I did not expect that my inquiry would go beyond my account, but this issue may be bigger than me and my account and may involve the qualification status of the plan. It appears as though restrictions on deferrals on account of loans at least for non highly compensated employees are not permissible in a safe harbor plan. It also appears as though the plan operated with this restriction potentially while it was a safe harbor plan. HR is in the processs of reviewing the plan documents and operations to ensure all operational failures are properly identified and addressed.

[masteff]

... this issue may be bigger than me and my account ... operational failures ...

So the plan may well find itself having to use EPCRS. When it was just you and a mere month after the fact, using EPCRS would have been like using a 5-ton bomb when a shovel would work. But for a longer, deeper problem such as may exist, IRS code and regs will likely mandate they use the EPCRS process.

[BG5150]

When it was just you and a mere month after the fact, using EPCRS would have been like using a 5-ton bomb when a shovel would work.

But 5-ton bombs are way cooler!

[K2retire]

When it was just you and a mere month after the fact, using EPCRS would have been like using a 5-ton bomb when a shovel would work.

But 5-ton bombs are way cooler!

That depends on where you happen to be when it detonates!