"Missed deferral opportunity" - plan allows for correction of ADP by returning the excess

[taxllm]

Elections to defer from bonuses were not implemented for almost 10 years. The employer is doing a VCP correction. After they calculate the missed deferral and re-run the ADP test, the ADP fails. The plan allows correction of the ADP by returning the excess to all HCE. My question is: what is the missed deferral opportunity? Is it 50% of the missed deferral or 50% of the missed deferral reduced by the excess contribution? EPCRS deals with situations where the 402(g) limit or other plan limit is exceeded. In those situations the missed deferral opportunity is 50% of the reduced missed deferral. Thanks for any clarifications.

[ETA Consulting LLC]

The term "missed deferral" has different definitions depending on the circumstances. In your case, it appears as if elections were actually made in one form or another and simply not implemented. In that instance, the missed deferral would be 50% of the elections that were in place for each employee.

This would be different if an employee was eligible to defer and not even given a chance to make an election.

Good Luck!

[Guest Sieve]

toolkit -- If not given the opportunity to defer, the correction is 50% of the group (HCE or NHCE) deferral percentage. Not sure how I'd implement that when no one had an opportuinty to defer with respet to a bonus-onloy election.

Taxllm -- re: ADP, see this from EPCRS, Appendix A, Section .05(2):

"(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2),

in order to determine whether the plan passed the ADP or ACP test, the plan may

rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan and may

disregard the employees who were improperly excluded

." (Emphasis added.)

[taxllm]

toolkit -- If not given the opportunity to defer, the correction is 50% of the group (HCE or NHCE) deferral percentage. Not sure how I'd implement that when no one had an opportuinty to defer with respet to a bonus-onloy election.

Taxllm -- re: ADP, see this from EPCRS, Appendix A, Section .05(2):

"(g) The methods for correcting the failures described in this section .05(2) do not apply until after the correction of other qualification failures. Thus, for example, if, in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described in section .05(2)(b) through (f) cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(2),

in order to determine whether the plan passed the ADP or ACP test, the plan may

rely on a test performed with respect to those eligible employees who were provided with the opportunity to make elective deferrals or after-tax employee contributions and receive an allocation of employer matching contributions, in accordance with the terms of the plan and may

disregard the employees who were improperly excluded

." (Emphasis added.)

Need to clarify: the plan compensation included bonuses but when the deferrals were made they forgot to include bonus (the plan is not a safe-harbor plan). There was no separate election as to bonus. So to calculate the missed deferral mutiply the bonus by the elected deferral percentage. Then, I think that EPCRS says, add the missed deferral with the other deferrals made and if the sum exceeds the 402(g) limit or a plan limit reduce the missed deferral accordingly. In this case the 402(g) limit is not exceeded but when they run the ADP again, the ADP fails. So they correct the ADP by returning the excess contributions. Now, to calculate the missed deferral opportunity do you multiply 50% by the missed deferral or by the missed deferral reduced by the excess contribution distributed.

[ETA Consulting LLC]

toolkit -- If not given the opportunity to defer, the correction is 50% of the group (HCE or NHCE) deferral percentage. Not sure how I'd implement that when no one had an opportuinty to defer with respet to a bonus-onloy election.

I see what you're saying. I read it to say there wasn't a bonus-only election under the plan; the election in place for regular deferrals should've applied to bonuses as well.

This would be the basis for saying that there was an election, but it wasn't honored.

It does help to know the specifics in order to determine which equation applies. Typically, in the opening question, we end up guessing as to what the true fact pattern is

[Guest Sieve]

The above EPCRS cite says you don't have to re-run ADP to the extent of any missed deferral. So, corrective contribution is 50% of missed deferral.

Or, am I missing something?

[taxllm]

The above EPCRS cite says you don't have to re-run ADP to the extent of any missed deferral. So, corrective contribution is 50% of missed deferral.

Or, am I missing something?

Sieve,

Based on EPCRS the ADP does not need to be rerun. But there is this guidance on the IRS website (http://www.irs.gov/retirement/article/0,,id=175716,00.html) from which I pasted below the relevant part:

"As in the case of an erroneous exclusion of an employee from the plan, the remedy requires the employer to make a corrective contribution of 50% of the missed deferral (adjusted for earnings) on behalf of the affected employee. The employee is fully vested in those contributions, which are subject to the same withdrawal restrictions that apply to elective deferrals. However, unlike in the case of mistaken exclusions where the missed deferral amount is estimated based on the ADP for the employee category (e.g., NHCE), in both illustrative examples, the employees’ election deferral amount is known. Thus, the missed deferral and the corresponding corrective contribution (50% of the missed deferral) are based on the participant’s actual election instead of the ADP (i.e., 5% or 3%, respectively) of the NHCEs.

Before correcting for the exclusion, however, the plan must evaluate whether, in the event that the employee had made the missed deferral, it would still pass the applicable ADP test. The ADP test should be corrected according to the plan’s terms before implementing any corrective contribution on behalf of the employee. In addition, the missed deferral amount should be reduced, if necessary, to ensure that the employee’s elective deferrals (the sum of deferrals actually made and the missed deferrals, for which a corrective contribution may be required) comply with all other applicable plan and legal limits."

So in this case you rerun the ADP, it fails, correct the ADP by "returning"excess contributions." Is the missed deferral going to be reduced in this case because of the corrective distribution? just as in the case of a 402(g) limit problem? Let's say the missed deferral is $1,000, run the ADP test and find out that only $800 was allowed. Is the missed deferral opportunity $500 or $400? Thanks for your insight.