Incorrectly limited elective deferrals

[Ken Davis]

So far in 2011, we inadvertantly used the wrong salary number (base versus gross) when withholding from employees' paychecks for 403(b) elective deferrals, with the result that elective deferral contributions were understated. We need to correct this by contributing the correct amount to the plan provider, preferably in 2011. How do we handle getting the additional contributions from the employees? There is not enough payroll remaining in 2011 to catch up and still leave the emplyees with enough money to live on. Are we stuck with our company making the contribution in 2011 and withholding the money in 2012 to make the company whole. Would that mean the employees' W-2 is higher in 2011 than it should have been, and in 2012 lower than it should be?

Thanks,

Ken

[Lou S.]

Well since no one else is chimming in I'll take a stab. Mind you I don't work with 403(b) but rather 401(k) so if the rules are different here I apologize.

From the IRS fix it guide on 401(k) plans (near their EPCRS link) it sounds like you have a definition of compensation failure. You can check out this link for more info http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf#page=2.

Now you may not like the conclusion but in this case the IRS suggested fix seems to be to make an additional contribution on behalf of the affected participants (with interest) and not recoup it from the participants. I don't necessarily agree that this right thing to do as it seems like a windfall for the employees but generally the IRS fix is almost always in favor of the employee over the employer when there is some error.