Failure to withhold on bonus

[R. Butler]

Employer fails to withhold on bonus. Employer is making the corrective contribution at 1/2 the rate of each employee's election percentage. The question is in regards to the match. The plan has a basic safe harbor match determined over the plan year. Should the match be calculated as if the employees had made the full missed 401(k) or just calculated using the corrective contribution as deferral? It seems to me that in this instance the proper correction would be to calculates as if the employees had been made the full deferral, but really can't fnd anything directly on point.

Thanks in advance for any guidance.

[DMcGovern]

From Rev Proc 2013-12, Appendix A, 2(d)(i), "If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a safe harbor Section 401(k) plan that uses a rate of match contributions to satisfy the safe harbor requirements of Section 401(k)(12), then the missed deferral is deemed equal to the greater of 3% of compensation or the maximum deferral percentage for which the employer provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee." That defines the "missed deferral". It further states, "The required QNEC on behalf of the excluded employee is equal to )i) 50% of the missed deferral, plus (ii) either (A) an amount equal to the contribution that would have been required as a matching contribution based on the missed deferral in the case of a safe harbor Section 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements of Section 401(k)(12)...."

My understanding of this is that the match would be based on the full "missed deferral" amount as calculated in the first sentence.

[ETA Consulting LLC]

In this case, the employees were provided an opportunity to elect and actually made their elections; the employer merely failed to honor them. Hence, the missed opportunity is in reference to that actual election; not the maximum matched amount.

Based on the EPCRS, it would appear that you will provide the "full match", but only to the extent that the additional (full) amounts being deferred would've been entitled to the match. For instance, if someone's annual deferrals already exceeded 5% of salary prior to the missed amount, then there would be no correction for the match; since the missed deferrals wouldn't have received a match anyway.

Good Luck!

[jpod]

Just mentioning the obvious, which is that there is no operational error requiring correction unless the terms of the employee's election are such that the election applied to his bonus, as opposed to simply "regular salary" or words to that effect.