HR failed to start deferrals but participant is not newly eligible

[Guest Jennyb473]

We have a participant who entered the plan in 2009 but never elected to defer. This participant decided in June 2011 to start deferring 1% of compensation, which should have been effective 7/1/11, however HR missed the election and did not start deductions. Since this is not a newly eligible participant that was not given the opportunity to defer, does the employer still have to contribute 50% of her deferrals to make her "whole"? I'm reading some past post and the EOB and everything seems to be implied to a newly eligible participant not one that made a deferral change 2 years after entering the plan.

Any thoughts?

[Kevin C]

The usual situation where this happens is with a new participant, so that is where most of the discussions focus. I don't see Rev. Proc. 2008-50 as providing different treatment based on when they became a participant. The correction is for a failure to implement an investment election on a timely basis.

Rev. Proc. 2008-50, Appendix A, .05(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.

(b) Missed opportunity for after-tax employee contributions. For eligible employees who filed elections to make after-tax employee contributions 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 employee's missed opportunity for after-tax employee contributions. The missed opportunity for making after-tax employee contributions is equal to 40% of the employee's “missed after-tax contributions.” The missed after-tax employee contribution is determined by multiplying the employee's elected after-tax employee contribution percentage by the employee's compensation.

© Missed opportunity affecting matching contributions. In the event of failure described in section (a) or (b) of this section .05(5), if the employee would have been entitled to an additional matching contribution had either the missed deferral or after-tax employee contribution been made, then the employer must make a QNEC for the matching contribution on behalf of the affected employee. The QNEC is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined under this paragraph. The QNEC must be adjusted for earnings to the date the corrective QNEC is made on behalf of the affected employee.

(d) Coordination with correction of other Qualification Failures. The method for correcting the failures described in this section .05(5) does not apply until after the correction of other qualification failures. Thus, for example, if in addition to the failure to implement an employee's election, the plan also failed the ADP test or ACP test, the correction methods described in section .05(5)(a), (b) or © cannot be used until after correction of the ADP or ACP test failures. For purposes of this section .05(5), 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 not impacted by the Plan Sponsor's failure to implement employee elections and received allocations of employer matching contributions, in accordance with the terms of the plan and may disregard employees whose elections were not properly implemented.

[QDROphile]

The situation is different because the plan can quantify the mistake. With employees who were not given the opportunity to defer, the plan has no idea what the employees would have elected. I think the IRS has some guidance about the situation under a "fix-it" piece on the web site. A search for "fix-it" might turn up the document. There is other "fix-it" guidance on the web site, too.