403(b) Missed Deferrals

[EPCRSGuru]

I am inquiring about a possible contribution problem with a 403(b) tax-deferred annuity plan that is exclusively employee-funded. The sponsoring employer has employees who have multiple "jobs"--you might be half-time in Department A and half-time in Department B and therefore be a full-time employee, but the accounting is separate by job. The employer-funded plan calculates its contributions based on the eligible compensation of all the participants' jobs. But due to a programming error the employer withheld percentage salary deferral elections based on only one job--usually but not always the one with the most pay. (People who elected a specific dollar amount per paycheck are not affected, just the nes who said they want X% of pay withheld.) This has been going on for several years. When the participant signs on to the employer's benefits web site and starts to enroll the site tells him the estimated dollar amount of the deferral so the participant knows ahread of time what the amount will be, but no one has questioned the deferral amounts. It was discovered by the employer during a routine plan review.

The definition of compensation does not provide for consideration of only one job. There is also the question of whether the participants are given an effective opportunity to defer, especially for the small number of people whose job on the system was the lower-paid one.

Systems changes are in process to correct the problem for the future, but they are wondering what needs to be retroactively, IF ANYTHING. Needless to say, the employer is not really pleased at the thought of doing a retroactive contribution, which would including having to track down terminated participants who have already received their distributions. My belief is that the participants knew the effect of what they were electing based on seeing it on the web site during the enrollment process and they could have "corrected" their deferral election before hitting "submit" if they wanted a higher dollar amount withheld. Is there any wiggle room for the employer here?

[Flyboyjohn]

Only wiggle room I see is not making the EPCRS corrective contributions and taking your chances.

I guess you could try an anonymous VCP application and try the "it's the employees' fault" argument but I wouldn't give it much hope.

Fortunately they're not subject to CPA audit or the auditor would most likely "force" them to make the corrective contributions.

[Guest EE Bene]

Your answer is here:

http://www.irs.gov/Retirement-Plans/Fixing-Common-Plan-Mistakes---Correcting-a-Failure-to-Effect-Employee-Deferral-Elections

No wiggle room. If you don't correct, you risk disqualifying the whole plan.

http://www.irs.gov/Retirement-Plans/EPCRS-Overview