Eligible employee mistakenly excluded from making contrbutions.

[Guest ars]

I have read Q&A 117 and 118 and still have some additional questions.

Plan year equals calander year, entry dates are 1/1 and 7/1, maximum deferral percentage is 15% of W-2 comp.

Participant (NHCE) was excluded for the first two months of 2000. Is the proper correction to allow for contributions in excess of 15% to make up for being excluded for the first two months. This would then need to be monitored so that total contributions do not exceed 15% of compensation for the year.

Thanks for any help...

[bzorc]

In my experience, if an eligible employee is omitted, that person is given an option to make up the "missed" contributions either over the remaining part of the year (thus greater than 15% deferral), or on a one time make-up contribution on the next payroll check. This has, in my experience, been approved by the attornies that have been involved with the plan.

In fact, I had a client who had duel entry dates (1/1 and 7/1), but used whole year compensation for all plan purposes. They would allow a mid-year entrant to defer up to 30% of pay for the second half of the year, so that the annual result would be 15% of overall compensation. No complaints from the ERISA attorney on the case. In fact, it was his idea....

Hope this helps.

[Guest ars]

Yes, it does help, thank you very much.

[Guest rsmelson]

See IRS Rev. Proc. 99-31 and Rev. Proc. 2000-16.

[Alf]

The key is to determine how your plan reads. Does the 15% deferral limit apply to compensation each payroll or month (probably not) or is it really an overall annual limit. You will only have a problem if the limit is literally imposed on a payroll or monthly basis. If so, I don't see how you can allow a participant to violate that rule by deferring more than 20% unless you simply look the other way (it still would be a violation of the terms of the plan document that is no better than the original excusion of the employee).

If the 15% limit is imposed on an annual basis, Rev. Proc. 2000-16, Sec 2.02(1)(a)(ii) contains a special correction rule (or non correction rule in this case) that can be used for brief (<3 months) exclusions from participation. However, it sounds like it will only work for you if the employee makes at least 84,000 (the employee must be able to defer the same maximum in the remaining period (10 months in your case) that he could have for the entire 12 month period so if 15% of 70,000 for 12 months =10,500, 15% of 84,000 for 10 months = 10,500).

[Guest ars]

The plan document states that the 15% limit is limited to YTD W-2 compensation. Thus it seems that the participant could make up contributions as long as the 15% of YTD compe, $10,500 limit and 25% limits are not exceeded.