Missed opportunity for elective deferrals...or not?

[Bird]

I've been asked to consult on a plan that did not withhold deferral contributions on bonuses and commissions, although the plan says that elections should apply to all compensation. They're already about 90% done with the process and called me in to review and help implement the corrections (it's a former client that left on good terms and they know me/us as being able to cut through the lawerly BS).

So, they've calc'd the "missed deferral opportunity" as 50% of the "missed deferral" as per Appendix A.05(5)(a). And the match on the missed deferrals. But just for the sake of finding the cite that I just noted, I went back to the ".05" part and it says this:

.05 Exclusion of an eligible employee from all [my emphasis] contributions or accruals under the plan for one or more plan years.

As emphasized, it says "all." These folks weren't excluded from all contributions. (And by the way, none of them said a word about it. And also FWIW, at least one election was verbal, and perhaps there was implied consent since no one complained...?) Would it be reading this too literally to say that this isn't the right section, and that it doesn't actually need correction, or perhaps some other correction?

FWIW this came up on the CPA 5500 audit; they just noted it but didn't say anything about correcting it.

[Bird]

...well, I found at least one IRS outline that gives this exact situation as an example of a missed deferral opportunity, so I guess that answers that. Still curious to see what others think.

[Kevin C]

I think they have it right. It is a failure to properly implement the participants' deferral elections.

Would the frequency and timing of the bonus and commission payments allow it to fit under the rules for a brief exclusion? That's probably a stretch, but it's worth looking at.

[BG5150]

Appendix B, Section 2.02 has the correction for partial year.

[QDROphile]

If you want some lawyerly BS, there is a difference between not implementing terms of an election (e.g. not applying it to bonus) and excluding an employee from all deferrals (not enrolling). The correction is different.

[BG5150]

From EPCRS, failure to implement instructions for partial year. (spacing added)

Appendix B, Section 2.02 (1) (a) (ii) (B) (2)

(2) The appropriate corrective contribution for the plan’s failure to implement an employee’s election with respect to elective deferrals is equal to the missed deferral opportunity which is an amount equal to 50% of the employee’s missed deferral. Corrective contributions are adjusted for Earnings.

The missed deferral is determined by multiplying the employee’s deferral percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a fixed dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a fixed dollar amount to be deferred for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making elective deferral contributions divided by 12.

The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding three sentences) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit).

The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ADP test before this correction method can be used, as described in Appendix A, section .05(5)(d), still apply.

[Bird]

Thanks!