401(k) deferrals missed on a recent check

[JKW]

Hello. I have a plan that forgot to withhold 401k on an extra payroll run for 4 employees last week. What is the best way to fix this? Can they withhold the amount from an extra check?

[K2]

Send the deferrals in now and make an adustment on the next check.

[Kevin C]

There is a pre-approved correction method for a brief exclusion from deferrals in Rev. Proc. 2016-51, Appendix B, 2.02(1)(a)(ii)(F).

https://www.irs.gov/irb/2016-42_IRB/ar12.html

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(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 (C), 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. (See Examples 6 and 7.)

 

[Belgarath]

Hi Kevin - are you sure that really applies in such a situation? I'd have said it only applies where an employee was improperly EXCLUDED from making any deferrals for a certain period. That isn't the case here - an election was already in place, and just wasn't followed.

[Kevin C]

Under Rev. Proc. 2016-51,  section 2.02(1)(a)(ii)(B)(2), "elective deferral failures" include the failure to correctly implement a deferral election. The correction I cited above specifically refers to 2.02(1)(a)(ii)(B) which includes both (1) referring to not allowing eligible employees to defer and (2) referring to not correctly implementing a deferral election. So, yes, I'm sure this correction method applies here. 

 

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Section 2.02(1)(a)(ii)(B)(2) The appropriate corrective contribution for the plan's failure to implement an employee's election with respect to elective deferrals is equal to the missed deferral opportunity which is an amount equal to 50% of the employee's missed deferral. Corrective contributions are adjusted for Earnings. The missed deferral is determined by multiplying the employee's deferral percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. If the employee elected a fixed dollar amount that can be attributed to the period of exclusion, then the flat dollar amount for the period of exclusion may be used for this purpose. If the employee elected a fixed dollar amount to be deferred for the entire plan year, then that dollar amount is multiplied by a fraction. The fraction is equal to the number of months, including partial months where applicable, during which the eligible employee was excluded from making elective deferral contributions divided by 12. The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding three sentences) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ADP test before this correction method can be used, as described in Appendix A, section .05(5)(d), still apply.

 

[Belgarath]

Thanks Kevin - Maybe I'm just being dense today, but I'm still not seeing this as the appropriate reference for the correction. To me, the appropriate reference is Appendix A, .05(8) through .05(10). Thoughts?

Gracias.

[Kevin C]

There is a slight difference between Appendix A.05(9)'s less than 3 month exclusion and the brief period exclusion under Appendix B 2.02(1)(a)(ii)(F). Under Appendix B, the failure must end in the first three months of the plan year (the participant being able to defer for the last 9 months of the plan year is required). Under Appendix A, the failure must last less than 3 months.  In this case, assuming a calendar year plan, I read  "last week" as referring to a March payroll, so they should be able to use either method.  I wasn't thinking of this difference in methods when I responded above, but unless my assumption of a calendar year plan is incorrect, I still feel the Appendix B 2.02(1)(a)(ii)(F) correction method is available. 

 

Appendix A .01(2) starts off with "Correction methods permitted in Appendix A and Appendix B are safe harbors. Correction methods permitted in Appendix A and Appendix B are deemed to be reasonable and appropriate methods of correcting a failure. Both Appendices set forth various correction methods that may be used to correct a failure, depending on the facts and circumstances. A Plan Sponsor may choose any correction method by which the plan can satisfy the eligibility requirements.  ..."

[Belgarath]

Seems reasonable. Thanks.