Payroll company mix up

[K2retire]

Plan participant (HCE) is transferred from one geographic location to another. A large bonus is paid to the participant as part of the relocation. The payroll company fails to withhold the appropriate health insurance premiums, additional Federal tax withholding and 10% salary deferrals that the participant has requested for the one pay period that includes the large bonus. The client would like to make up all of these missing amounts from the next pay period. Assuming the participant agrees, is that an appropriate fix for the missed deferrals, or must they make a QNEC?

[masteff]

I think it's appropriate because I think your situation qualifies for the special rule in paragraph F on page 96: http://www.irs.gov/pub/irs-drop/rp-13-12.pdf

[MWeddell]

To use the rule that masteff cited, there must be at least 9 months left in the plan year and one still has to make up for missing matching contributions.

On the other hand, the EPCRS does not limit one's corrections to only the pre-approved methods. Perhaps there is room, especially if the participant agrees, to interpret it to let the situation ride as is because the participant subjectively has time to make up for the missing deferrals and an opportunity to earn the missing match.

[Kevin C]

For the brief period exclusion rule, the requirement is that the participant have the opportunity to defer for at least the last 9 months of the plan year. For someone improperly excluded from all deferrals, that effectively requires correction during the first 3 months of the plan year so that the participant is able to defer for the last 9 months. But, it doesn't specifically say that only failures corrected in the first quarter (at least 9 months before year end) are eligible. The actual wording is:

... for an employee for a plan year if the employee has been provided the opportunity to

make elective deferrals or after-tax employee contributions under the plan for a period

of at least the last 9 months in that plan year and during that period the employee had

the opportunity to make elective deferrals or after-tax employee contributions in an

amount not less than the maximum amount that would have been permitted if no failure

had occurred.

I think that would also apply if someone was able to defer for at least the last nine months with the exception of a bonus check, provided that there is sufficient time after the error that the participant could change their election to max out deferrals if they wanted to. If the IRS really wanted to limit this to only apply to corrections done in the first 3 months of the plan year, I think they would have said so. That would have been a lot easier to write than what they did. Like so many things in this business, I'm sure others have differing opinions.

[K2retire]

Kevin, thanks for helping me think outside the box!