QNEC for missed match

[401(k)athryn]

A plan has a safe harbor match allocated on an annual basis.  The client has realized that there were 4 employees eligible on January 1, 2018 who have not been given the opportunity to defer.  I will advise them on the correction under EPCRS, which is a 25% QNEC based upon 3% missed deferral and a missed SH Match plus earnings.  They will notify employees as required.

Question -  Is the compensation based upon compensation from 1/1/2018 through the date the employee is given the opportunity to participate?  I would think yes, but when I calculate the annual safe harbor match for ALL employees at year-end, this portion of compensation will be included in the calculations.  It would seem as though the affected employees will get matched on this compensation twice.  Is that how it is meant to work?

Thanks!

[Tom Poje]

cute name

Appendix B has

(D) Matching Contribution Failures. (1) The appropriate corrective contribution for the failure to make matching contributions for an employee because the employee was precluded from making elective deferrals (including designated Roth contributions) or after-tax employee contributions for a portion of the plan year is equal to the matching contribution that would have been made for the employee if (1) the employee’s elective deferrals for that portion of the plan year had equaled the employee’s missed deferrals (determined under section 2.02(1)(a)(i)(B)) or (2) the employee’s after-tax contribution for that portion of the plan year had equaled the employee’s missed after-tax employee contribution (determined under section 2.02(1)(a)(ii)(C)). This matching contribution is reduced to the extent that (i) the sum of this contribution and other matching contributions actually made on behalf of the employee for the plan year would exceed (ii) the maximum matching contribution permitted if the employee had made the maximum matchable contributions permitted under the plan for the plan year. The corrective contribution is adjusted for Earnings. The requirements relating to the passage of the ACP test before this correction method can be used, as described in Appendix A, section .05(2)(g), still apply.

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if you are calculating the match just once a year, then I guess there is no corrected match in this situation(since no match was really missed until after the end of the year), but the amount of match would be based on total deferrals that should have been made, not on deferrals actually made plus 25% missed deferral.

at least, that is how I would read it.

 

 

[401(k)athryn]

Tom - Thanks!  So, let's say the employee's compensation from 1/1/18 through the end of error period is $10,000.  The missed deferral is 3% of pay ($300) because that is what EPCRS dictates when it is a safe harbor match plan.  The QNEC for the missed deferral is 25% of the missed deferral, which would be $75.  This is somehow adjusted for earnings.  I am fine with all of this so far.

If the match is not actually made until after the year, then I suppose it is not "missed", as you say.  When calculating the 2018 match in January/February 2019, I would use actual full year compensation. 

Question - Would I use actual deferrals (as listed on W-2s) PLUS the "missed deferral" of 3% when calculating the safe harbor match for these participants? 

[Tom Poje]

that is how I read it, or put another way, ignoring any correction for missed deferral,

if the person was deferring at 3% and made 40,000 for the year, they would have deferred 1200 and base the match on that figure and the 40,000 in comp.

while the correction for missed deferral is not a full 3%, the govt realizes the person had no actual deferrals, so they have the 3% in their pocket, and making up a full 3% produces a nice windfall, so to speak. 

the match, on the other hand, would have been made by the company anyway if the error had not occurred, so it would be the full amount.

[401(k)athryn]

Works for me.  Thank you!  I'll just have to make a note to remind myself to add the 3% in deferrals when I calculate the match early next year. 

I appreciate your input!