Correction for "brief period" improper exclusion

[Belgarath]

While this is actually regarding a SIMPLE-IRA plan, let's use a 401(k) as an example.

Suppose someone should have been eligible to defer as of January 1, 2015. They were inadvertently excluded from being able to make deferrals until March 1, 2015 - well within the 3-month period allowed for "brief period" exclusions under Rev. Proc. 2013-12, Appendix B, Section 2.02(F). No other limitations in the plan on what can be deferred - up to the IRS limits. Matching formula is 100% up to 3%.

So, there is no required contribution for "missed deferrals." But there is a contribution required, or potentially required, for missed match.

My question is twofold. First, if an employee chooses NOT to defer for 2015, is there any required make-up for missed match? It seems to me that there should not be, but the language/example isn't all that clear to me. The Example 7 seems to contemplate a per payroll situation, and it doesn't seem reasonable to me to apply this to someone who elects not to defer at all.

Second, if the answer to the above is that a missed match make-up contribution is required, then I'd assume it would simply be 3% of compensation for the improper exclusion period.

Now, for someone who actually defers, if the match isn't calculated on a per payroll basis, then it seems like it can't be calculated until the end of the year. Suppose the employee elects to defer 10%. Compensation for the improper exclusion period is 10,000, and compensation for the remainder of the year is 50,000. So the employee defers 5,000. Since the match is 100% up to 3% of compensation ($60,000 x .03 = $1,800) there's no additional special make-up match for the exclusion period 'cause the deferral was sufficient to receive the maximum match anyway.

I'd appreciate any thoughts on the above.

[Kevin C]

You are correcting the improper exclusion of a participant, so I don't see how a later election to not defer by the same participant changes the correction or the situation. If EPCRS was going to let you not correct in that situation, it would say so.

The correction that applies would be based compensation for the improper exclusion period.

[Belgarath]

Thanks Kevin - I was afraid of that, which is why I asked the question. I was hoping for a different answer!

[LANDO]

Just to be clear, if we were talking about a 401(k) you'd use the average deferral rate for the group the EE falls into unless it's a safe harbor 401(k) plan, although the above makes sense since you were really talking about a SIMPLE IRA, in which case the missed deferral is "deemed to be 3%".

[Mike Preston]

I agree with what Belgarath described (1: that correcting the missed match seems inappropriate in some cases, but correcting the match is nonetheless required and 2: that correcting the missed deferrals is not required because of the short period exception.

It sounds like others are saying that you have to correct both. If that is what they are saying I disagree.

[Kevin C]

Looks like my wording could have been better. I agree that a contribution is not needed to correct the missed deferrals due to the short period exception, but I still consider the missed deferrals to be corrected. The intent of my reply was to say I think the match has to be corrected, not that I think any action is needed to correct the missed deferrals in this situation.