Missed Deferral Opportunity

[Gilmore]

My apologies if this fact set is covered elsewhere, and appreciate any thoughts.

One owner corporation sponsors calendar year 401(k) non-safe harbor plan.  No employees until 2018, one employee becomes eligible for plan in 2019, owner neglects to provide the opportunity to participate.

Owner has not contributed to the plan yet in 2019.  Obviously the plan is top heavy.

Assume first that the owner will not participate in 2019.  How do I determine the missed deferral opportunity if there were no NHCE deferrals in the past?

Can I use 3% (similar to the rate used in the first year of a plan using prior year testing)?  If so, is the QNEC 50% of the 3%? 

Let's assume next that the owner does want to participate, and let's assume the owner wants to defer 10% of their compensation.  Is the QNEC now 4% (that is, 50% of the 8% needed to pass ADP)?

If any of that is actually correct, does all of the missed deferral correction amount count towards top heavy, or must the top heavy minimum be contributed in addition to the correction amount?

Thanks very much.

 

[Nate X]

See Pages 24 - 28

https://lrus.wolterskluwer.com/media/2607/tag_ppt_presentation_for_ftw_conferences_2018_wright.pdf

EPCRS states you would correct the missed deferral opportunity based on the employees group.  So if the employee is a NHCE, then his/her missed deferral opportunity would not be compared to the owner's deferral percentage.

There's no guidance that says you can use 3%, but it certainly seems more prudent than zero.

[Gilmore]

Hi Nate,

Thanks. 

With respect to the 3% deferral rate, would the QNEC then be 50% of the 3%? 

My question regarding the owner was with respect to the ADP test.  Assume the owner that has not deferred so far in 2019 decides to defer 10% before the year is out.  The ADP test would need to be satisfied by an 8% NHCE ADP.  Under those circumstances is the missed deferral opportunity now 50% of 8%?

 

 

 

[TPApril]

Gilmore - I'm curious what you ended up doing.  I'm looking at a plan with 0% NHCE ADP and trying to determine the MDO as well. HCE ADP is also 0% btw so no test failure.

[Bri]

I had a plan like this, the one employee, NHCE, not told about the plan - ERISA counsel said the IRS is okay with using 3% as the MDO (and that it would cover the top heavy minimum, too).