Defferals Deposited to 401k Plan but not withheld from paychecks

[Yvonne T]

I have a new situation and I am not sure how to correct the error. A company started a new safe harbor 401k plan in 2015. Employees completed forms and elected to defer. The payroll company entered the employees' elections in their payroll system, but coded them as "safe harbor". The employer used the payroll reports to submit the "deferrals" to the plan each pay period. The employer also submitted the safe harbor match each pay period based on the "deferrals". The deferrals were never withheld from the employees' pay. The employees' W2's show no deferrals. The employer technically corrected the "missed deferral" each pay period during the year. There were no lost earnings because their "deferrals" were deposited each pay. They also received the correct match each pay. The employer funded the deferral for all of the employees for the entire year. Should the "deferrals" be coded as QNEC? Has anyone ever have this situation before? Does anyone know what the proper correction should be?

[QDROphile]

Try thinking of it as the employer gave everyone raises to the extent of the deferrals. That would make FICA wages understated and FICA withholding and employer contribution would have to be corrected It could also violate the rule about giving benefits other than a match as a reward for deferral. Check the regulation.

Another approach would be the obvious -- the employer mistakenly overpaid the employees outside of the plan. That might send you on some sort of recoupment analysis and into state law, among other things.

[ETA Consulting LLC]

Generally, you would compare two situations: 1) What should've happened and 2) What actually happened. On the surface, it appears as if each participant's account balance is exactly what it should be had things occurred the way they should have. The difference would be in how the W2 forms (which are technically accurate) are reported.

In looking for a reasonable (and perhaps VERY conservative) approach, you could reclassify the amounts received as deferrals as "Qualified Employer Contributions" and move on.

When you look at it, a Qualified Employer Contribution (whether it's a QNEC, QMAC, SHNEC, or SHMAC) is the exact same thing after the funds hit the trust. Their only distinction is at the point they are calculated. Once in, they have the same vesting requirements and distribution restrictions.

This should keep the plan compliant with respect to operational error and reasonable correction (and should be achievable through SCP); meaning no VCP submission would be necessary. When it comes to whether the Employer seeks financial remedy from the Payroll Provider, that may be an entirely different issue. Nonetheless, it would be a civil issue (or service issue) that would fall outside of the actual plan compliance at this point.

This is merely one of potentially unlimited 'reasonable' approaches to explore.

Good Luck!