Missed Opportunity to Defer-403(b) Plan

[Randy Watson]

In general, if you exclude an employee from participating in a 401(k), you can correct that operational failure under Rev. Proc. 2008-50 by making a QNEC equal to 50% of the "missed deferral". In a 401(k) plan, the missed deferral is the ADP for the employee's group. Since an ADP test is not performed in a 403(b), are there any alternatives to the ADP as the "missed deferral"? Can we go with the 3% that would be used in safe harbor plan?

[Kevin C]

I would do the correction in a 403(b) the same way you would for a 401(k) even though the 403(b) deferrals are not subject to ADP testing.

Rev. Proc. 2008-50, Appendix A .01 General rule. This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure. To the extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, the correction method listed for such failure may similarly be used to correct the failure.

[Randy Watson]

I would do the correction in a 403(b) the same way you would for a 401(k) even though the 403(b) deferrals are not subject to ADP testing.

Rev. Proc. 2008-50, Appendix A .01 General rule. This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure. To the extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, the correction method listed for such failure may similarly be used to correct the failure.

Yes, that would be ideal. I just think it's odd to have a 403(b) calculate ADP when that test doesn't even apply. The sponsor would have to go and engage a TPA to calculate ADP for numerous years when they could easily use a 3% deferral like you would in a safe harbor plan.

[Guest robwgriff]

I would do the correction in a 403(b) the same way you would for a 401(k) even though the 403(b) deferrals are not subject to ADP testing.

Rev. Proc. 2008-50, Appendix A .01 General rule. This appendix sets forth Operational Failures and Correction Methods relating to Qualified Plans. In each case, the method described corrects the Operational Failure identified in the headings below. Corrective allocations and distributions should reflect earnings and actuarial adjustments in accordance with section 6.02(4) of this revenue procedure. The correction methods in this appendix are acceptable to correct Qualification Failures under VCP, and to correct Qualification Failures under SCP that occurred notwithstanding that the plan has established practices and procedures reasonably designed to promote and facilitate overall compliance with the Code, as provided in section 4.04 of this revenue procedure. To the extent a failure listed in this appendix could occur under a 403(b) Plan, a SEP, or a SIMPLE IRA Plan, the correction method listed for such failure may similarly be used to correct the failure.

Yes, that would be ideal. I just think it's odd to have a 403(b) calculate ADP when that test doesn't even apply. The sponsor would have to go and engage a TPA to calculate ADP for numerous years when they could easily use a 3% deferral like you would in a safe harbor plan.

Per the attached link - you are able to use the 3% Safe Harbor Method: http://www.irs.gov/retirement/article/0,,id=171022,00.html

[Guest Golden401k]

Does the issue and correction need to be dislosed anywhere on Form 5500? My understanding is this is not considered a prohibited transaction.