402g Limit exceeded where QNEC is used to fund missed contributions

[legort69]

Payroll company missed first 3 months of deferral deductions which equals $3,000. The participant received a 25% QNEC ( $750 EE) for the failed opportunity on the deferral + full match and gains for that period.

Participant continues on their own to contribute the full $18,000 pre-tax for the year plus the safe harbor match.

Did the participant exceed the 402g limit by contributing $18,000 + receiving a 25% QNEC on those missed deferrals? If so, how should this be remedied?

Thanks for your guidance on this matter.

[Tom Poje]

when you file your taxes, the IRS looks at your W-2 to see how much you deferred.
QNECs are not included so the 402g limit has not been exceeded - at least in the regular sense of the word.
however the whole purpose of making a QNEC is for the lost opportunity to deferral - since the person was actually able to defer the maximum I'm not sure they should have received the QNEC, in which case it should be removed, or at least I could see looking at it that way.

even under EPCRS Appendix B section 2 .02 F
(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Contributions. An Plan Sponsor is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and ©, but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D), 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.

[legort69]

Thanks Tom. The QNEC was funded early in the year before the deferrals started. I don't believe that it was communicated to the participant that his 402g limit would be adjusted to account for the QNEC. If we attempt to remove the QNEC from his account (and attributed match) after the end of year, then he would have a legitimate grievance in that he would have not contributed as much and the free money QNEC should stay in the account. I don't know how else to frame it.

[SavingsRUS]

Is it possible that section .05(5)(a) of Appendix A to Revenue Procedure 2013-12 applies? It states "The employee's missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under 402(g) for the calendar year in which the failure occurred." If so, then the missed deferral would be reduced to zero, and no amount would be required to fund the missed deferral opportunity.

[Tom Poje]

while I understand your point of 'legitimate grievance' the regs are not intended to create a windfall for someone. (In fact, as I recall, that is what the IRS said when they revised the correction procedures for missed deferrals)

lets suppose we take it to an extreme. company missed deferrals 3000 / month for 6 months so they put 18000 into the QNEC account. throughout the rest of the year the person defers 18000 so he can get his tax break. such a great deal for the employee. would you say he has a legitimate grievance not to have the 18000 QNEC removed claiming he didn't know he would lose it?

there are other similar situations where this occurs.suppose a company matches per payroll. the employee defers enough to max out defers by Sept, so he gets no match for the remainder of the year. he can't later claim "If I had known I would get a larger match by evening out my deferrals throughout the year that is what I would have done so please make up my match"

[buckaroo]

We have a similar situation here, but with a twist in how EPCRS is written. We are hoping that we can get clarification. In EPCRS, Appendix A, Section .05(5)(a), it states the employee's missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed the applicable plan limits, including the annual deferral limit under 402(g) for the calendar year in which the failure occurred.

My issues is the portion of the phrase "...the missed deferral does not exceed..." Does this mean that the participant should have their elective deferral limit reduced by the amount they would have contributed?

Example 1: The participant makes 100,000 annual eligible comp. He elects 18% as of 1/1. On 7/1, the PS discovers that his deferral election was not implemented. The PS wants to provide a 25% QNEC. Based on what he would have deferred (9,000), he would get 2250 as a QNEC. Based on the phrase above, is his remaining elective deferral limit supposed to 9,000? This is based on 18,000 - 9,000 missed deferral opportunity. Or should it be 15750?

Let me take it to the extreme using another example: Ptp makes 100K per MONTH of comp. He elects 18% as of 1/1. The issue is discovered in May of that same plan year. The PS wants to provide a 25% QNEC. Based on what he would have deferred (18,000), he would get 4500. Based on the information above, is his remaining elective deferrals limit 0? Or should it be 13,500.

Assume no auto enroll features.

Any help is greatly appreciated.

[Loves401(k)]

This is my question today.  Can anyone help me?