401(k) deferral understated

[poisnivey]

We had a new earnings code used for  group of associates on our last payroll that was not setup correctly as 401k eligible.  It was caught after 1 payroll and will be corrected on the subsequent run.  So while everyone who elected a deferral had their deferral calculate on part of their earnings, there were some whose contribution did not calculate on all of their earnings due to this code.  For example, base salary $500, new commission code $100, 10% deferral should have been on $600, but we took on $500.00

Proposed correction method is letting everyone who was affected know that they can increase their deferral to make up for any part on their end, and let our match true up catch anyone who missed a match contribution.  (safe harbor plan, match contributions every payroll with true up at year end)

Comments?  We at first thought we had to do QNEC on match, however, would get double match at true up time.

[justanotheradmin]

What you propose is a permitted correction method. Make sure to give out a written notice explaining the error, the correction, and the right to adjust future deferrals. The specifics of what needs to be in the notice is in Revenue Proc 2018-52
Since your SH match is annual and you are not required to deposit each pay period (even though you choose to) I think letting it get fixed in the year end true-up is acceptable. Just make sure the true calculation is based on a total deferral amount that includes what WOULD HAVE been been deferred for the missed comp, not what was actually deferred. 

Here is a link to the Rev Proc. https://www.irs.gov/pub/irs-drop/rp-18-52.pdf

One more thing, usually the notice has to go out within 45 days, so hopefully you can meet that deadline, depending on when you caught and fixed the error.