414s problem

[pixmax]

My client uses total compensation as their definition. For some reason they thought it excluded bonuses. 2 NHCE's received a bonus and did not defer on that bonus. First they did not use the correct definition and even if the plan excluded bonuses 414s would fail. How do I correct this? Do I tell them that deferrals should have been taken out of the bonus? What would happen under audit?

[Belgarath]

Yes, deferrals should have been taken out of the bonus, assuming there was no otherwise applicable limit that they had reached. As you suggest, this should be corrected.

While one can never tell what would happen upon audit, this is likely to get picked up. The auditor looks at the W-2, which says $20,000, then looks at a deferral election that says 5%, which means there should have been a deferral of $1,000. The auditor then sees that only $900 was deferred, and now you have a problem.

[12AX7]

Maybe I'm getting a little off-track on the issue, but I don't think this could ever be a 414(s) issue, even if comp excluded bonuses for deferral purposes. It seems that the terms of the plan were violated and perhaps correction is needed as Belgarth suggested.