Incorrect Deferral Percentage Correction

[heygents]

During a recent audit, it was found that one of the randomly selected participants was only having 2% deferred from their pay when they had indicated in their enrollment forms that they wanted to contribute 4%. This form was filled out in 2005 so it has been quite some time that the participant was not getting the correct amount taken from his pay. Obviously the employer is going to have to correct this mess.

Some questions:

1. I know the correction method is 1/2 of missed deferrals, 100% of missed match, plus any gains. Is there an easy (or easier) way of calculating this other than going back and looking at when each additional amount would have been invested?

2. Is there any sort of onus on the participant to bring it to the employers attention? It is hard to believe that 10 years went by and the participant never said anything.

3. Any statute of limitations, etc?

Thanks

[QDROphile]

The plan can make its case that the participant ratified the percentage (or was otherwise partially responsible for the lack of prompt correction) in VCP.

[jpod]

What type of audit? An IRS audit?

[heygents]

What type of audit? An IRS audit?

An annual large plan 5500 audit done by a CPA.

[jpod]

Ok, then I agree with QDRO that the "ratification" argument is worth a try under VCP. Don't have enough experience with this situation to know whether going the John Doe route is the way to go.

[Belgarath]

Any chance the deferral form contains some sort of language similar to the following - common type of language found in deferral forms. Might help you bolster your argument with a VCP filing. Depending upon the auditor and plan's legal counsel, they might even determine that there is no "error" requiring a VCP filing or self-correction. Has anyone ever actually experienced an IRS audit in such a situation, and did the IRS accept that argument?


Duty to review pay records. I understand I have a duty to review my pay records (pay stub, direct deposit receipt, etc.) to confirm the Employer has properly implemented my salary deferral election. Furthermore, I have a duty to inform the Administrator if I discover any discrepancy between my pay records and this salary deferral agreement. I understand the Administrator will treat my failure to report any withholding errors for any payroll to which my salary deferral agreement applies, by the cut off date for the next following payroll, as my affirmative election to defer the amount actually withheld (including zero). However, I thereafter may modify my deferral election prospectively, consistent with the Plan terms.

[jpod]

I'd be interested to know what the IRS thinks about that kind of language in an election form. Hard to believe that the IRS would be willing to give an employer a free pass to make plan administration errors just by including some "fine print" on an election form, but I can see the logic of it.

[Belgarath]

Agreed. That's why I wondered if anyone had seen a real live case, and whether the IRS bought the argument that based on the form, they would let it go.