Missed Deferral When Employee Had Knowledge

[ERISA-Bubs]

This is a typical missed contribution scenario with a twist. An employee had an election on file, but it wasn't honored by the employer for several months because the benefits department did not receive it. Employee noticed this and contacted the benefits department. Benefits department told employee they had no election on file.

Employee, with this knowledge, waits several months to inform the benefits department that she should have an election on file. At that point, the election is found and implemented.

I know that the employer will have to correct for the first period (50% deferral plus 100% match), but what about the period where employee had demonstratable, actual knowledge of the error and did nothing to correct? Is the correction the same for this period?

Thanks for all responses.

[Bill Presson]

This is a typical missed contribution scenario with a twist. An employee had an election on file, but it wasn't honored by the employer for several months because the benefits department did not receive it. Employee noticed this and contacted the benefits department. Benefits department told employee they had no election on file.

When the employee contacted the benefits dept and they said there was no election, they should have insisted on having the employee completing one at that time which would have greatly mitigated their liability.

Pretty silly when an employee points something out and HR does nothing.

[EPCRSGuru]

What would the employee be expected to do other than notify the benefits department?

Seems to me this is the price the Plan sponsor pays for not adequately training its HR reps.

[ETA Consulting LLC]

If all of this happens within the same year, then the employer could allow the employee to increase their deferral percentages in order to get where they would otherwise have been had the deferrals not been missed. If you wished to defer 5% between January and March and that was never implemented, there's nothing precluding you from deferring 10% between any other three month period to catch back up; especially if there remains ample opportunity to defer and catch back up prior to year end.

Good Luck!

[BG5150]

If all of this happens within the same year, then the employer could allow the employee to increase their deferral percentages in order to get where they would otherwise have been had the deferrals not been missed. If you wished to defer 5% between January and March and that was never implemented, there's nothing precluding you from deferring 10% between any other three month period to catch back up; especially if there remains ample opportunity to defer and catch back up prior to year end.

Good Luck!

I believe that only applies to the first three months of the plan year. From the EOB:

(vi) Partial year exclusion for brief period. There is a special rule relating to partial year exclusions involving a brief period. Specifically, if the employee is permitted to make elective deferrals (and/or after-tax employee contributions, if applicable) for at least the last nine months of the plan year, no corrective contribution is required with respect to the missed deferral opportunity or missed employee contribution opportunity for the first three months of the plan year, so long as the employee has the opportunity for such plan year to make the elective deferrals (and/or after-tax employee contributions, if applicable) in an amount no less than the maximum amount that would have been permitted had no failure occurred. However, a corrective contribution for the missed matching opportunity, as described in (iii) above, is still required for such period.

So, the participant can himself make up the missed deferrals, but only for the first three months, and only if there are nine months left in the plan year.

[12AX7]

BG, I know you're citing from EOB, but I can't find this in Rev. Proc. 2008-50. This is what I come up with from the Rev. Proc:

(5) Failure to implement an employee election. (a) Missed opportunity for elective

deferrals. For eligible employees who filed elections to make elective deferrals under the

Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor

must make a QNEC to the plan on behalf of the employee to replace the “missed deferral

opportunity.” The missed deferral opportunity is equal to 50% of the employee’s “missed

deferral.” The missed deferral is determined by multiplying the employee’s elected

deferral percentage by the employee’s compensation. If the employee elected a dollar

amount for an elective deferral, the missed deferral would be the specified dollar amount.

The employee’s missed deferral amount is reduced further to the extent necessary to

ensure that the missed deferral does not exceed applicable plan limits, including the

annual deferral limit under § 402(g) for the calendar year in which the failure occurred.

I understand that HR perhaps did not receive the deferral election, but this is the closest I came up with.

[Guest Sieve]

12AX7 --

The EOB is not always right, but this time it is. Check out EPCRS, Appendix B, Section 2.02(1)(a)(ii)(F):

"Special Rule for Brief Exclusion from Elective Deferrals . . .

An employer is not required to make a corrective contribution with respect to elective deferrals . . . if the employee has been provided the opportunity to make elective deferrals . . . under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals . . . in an amount not less than the maximum amount that would have been permitted if no failure had occurred."

This is demonstrated in Example 7 shortly after that EPCRS Section:

" . . . Employee Z . . . should have entered the plan on January 1, 2006 [but] was not offered the opportunity to participate in the plan. In March of 2006, the error was discovered and Employer E offered the employee an election opportunity as of April 1, 2006. Employee Z had the opportunity to make the maximum elective deferrals . . . that could have been made under the terms of the plan for the entire 2006 plan year. . . .

Correction

: Employer E uses the correction method for partial year exclusions, pursuant to section 2.02(1)(a)(ii), to correct the failure to include an eligible employee in the plan. Because Employee Z was given an opportunity to make elective deferrals . . . to the plan for at least the last 9 months of the plan year (and the amount of the elective deferrals ... that the employee had the opportunity to make was not less than the maximum elective deferrals . . . that the employee could have made if

the employee had been given the opportunity to make elective deferrals . . . on January 1, 2006), under the special rule set forth in section 2.02(1)(a)(ii)(F), Employer E is not required to make a corrective contribution for the failure to provide the employee with the opportunity to make ... elective deferrals . . . "

[12AX7]

Sieve, that's good info. It would be helpful in the next edition of EPCRS if the IRS would cite the appendices for additional info. Thanks !

[Guest Sieve]

The Appendices give examples of corrections, and the table of contents identifies the sections in each appendix. Always worthwhile to check them out before making a correction.