Mistake of fact deferrals???? Participant opted out.

[Lori H]

A participant in a small plan elected out of making pre-tax deferrals, however payroll did not pick up on this for several paychecks nor did the participant.

1) Can the deferrals along with income be returned to the participant?

2) If so, how would the company treat it? As ordinary income or would a 1099 be issued? Let's say the deferrals totaled $1000, the participant grosses 2000 per pay period. Would the plan sponsor just bump up the gross to $3000? It would not be subject to FICA, correct?

[Lou S.]

The easiest way might be to forfiet his account and use it to offset the next deposit.

Company writes him a check for the deferral. (or do a negative defferal if payroll company will allow)

Fix the W-2 with the payroll company to reflect no 401(k).

Adjust his withholding on the next payroll to cover the taxes that weren't taken.

[QDROphile]

Consider what you would do in accordance with Rev. Proc 2013-12 if this were an operational failure to follow plan terms. I am guessing that the plan says that contributions are determined by a participant's deferral election. It would look a lot like what was suggested above, with related earnings taken into account.

[masteff]

Since you're in the same tax year, I'd do as suggested above... run a retroactive payroll change and return the entire amount on the next paycheck. This fixes comp and taxes directly on the employee's W-2. Been there, done that, moved on.

If they are on a manual payroll or otherwise unable to process a retroactive change, the most thorough way would be to recalc all affected payrolls and net the changes to single adjusting line.