Correction when employee never enrolls

[Sidney]

There is no auto enrollment. A employee should have been permitted to enroll in the plan on Jan 1, but was not notified of the opportunity to enroll. The failure was discovered July 1. The employee has stated that he does not want to participate in the 401(k).

Even though the employee has said he does not want to participate in the 401(k), I think a QNEC is needed. I think EPCRS states that a QNEC of 25% of the ADP percentage for the NHCE group for the year of exclusion multiplied by the employee's compensation for the year is appropriate, but 1) is a correction necessary if the employee chooses to never enroll in the 401(k)? And 2) do we wait until the end of the year to make the correction, because we won't know his compensation for this year until the year is over.

I've looked at Rev. Proc. 2016-51 but it doesn't seem to address this fact pattern.

Thank you very much.

[Sidney]

Would it be handled this way?

A corrective QNEC should be made that is 40% of the ACP for the employee's NHCE group times the employee's compensation for the 6 months that the employee should have been permitted to participate (had he been so advised, and acting as though the participant would have chosen to participate).    2016-51, Appendix A .05(2)(e).

 

[Kevin C]

Yes, correction is needed even if the participant elects to not defer going forward. 

 

You are close.  The sections you need in Rev. Proc. 2016-51 are Appendix A.05 (9)(b) and Appendix B 2.02(1)(a)(ii). When you put them together, I think you will find that the pre-approved correction method is for the employer to deposit a QNEC of 25% of the applicable missed deferral rate times the participant's compensation for the portion of the year he was excluded, plus lost income and 100% of the missed match for the portion of the year he was excluded based on the applicable missed deferral rate.  Note that a notice to the participant is one of the requirements to be eligible for the 25% rate.

You don't say if the plan is safe harbor or not.  If it is, the applicable missed deferral rate will be based on the SH formula instead of the NHCE average deferral rate. 

If you are looking for a summary that is easier to read than the Rev. Proc., try this page on the IRS website:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-were-not-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees 

The conditions for the reduced 25% rate are listed in the Corrective Action section of the page.  Note, they add a requirement that the employee be employed at the time of the correction, which I don't see specifically mentioned in the Rev. Proc.

[Sidney]

Kevin,

Your post is enormously helpful and appreciated.

I've looked at the site you recommend, and that is a helpful summary.....to be saved for reference if (or, shudder, when, if occurs again).

Thank you,  Sidney

 

 

[Kevin C]

You are welcome.  Rev. Proc. 2016-51 has lots of good stuff in it, but it can be difficult to find what you need.