EPCRS--missed deferral opportunity based on ADP test

[FORMER ESQ.]

Suppose I have a traditional 401(k) plan without a match. Calendar year end. There is an employee who was not given the opportunity to defer into the plan from January 1, 2010 to February 15, 2016.  Assume the error was discovered on February 1, 2016 and the participant was given the right to defer beginning on February 15, 2016.

Suppose further that the reason for the missed deferral opportunity was a mistaken exclusion of the employee (so there was no deferral election in place). To determine the corrective QNEC amount, EPCRS has you look at the ADP of the group of employees (HCE or NHCE) that this employee belonged to during that period. Suppose the employee has been a NHCE for the entire period. 

Also, suppose the plan does the ADP test on a current year basis. 

For 2010 through 2015, the ADP for the NHCE is known. However, the ADP for the NHCE for 2016 is not known. What ADP is used for the remaining 1.5 months (from January 1, 2016 to February 15, 2016) when the ADP for 2016 for the NHCE will not be known until at least 12/31/2016? 

I do not see an answer to this anywhere in EPCRS, but it could be that I am just missing something very basic. Does anyone have any thoughts? 

[C. B. Zeller]

Maybe this is a silly question, but why don't we know the 2016 ADP? Last I checked we are past 12/31/2016. But for the sake of discussion I will assume it isn't known at the time the correction is being made.

When EPCRS does not specify a correction method for a given situation, you should do something reasonable under the circumstances. Any of the following might be reasonable:

• Use the 2015 ADP
• Use the average ADP from 2010-2015
• Use the highest ADP from 2010-2015
• Use the deferral percentage that was actually elected effective 2/15/2016

There are doubtlessly other reasonable methods as well. If you are filing VCP because this is a significant failure then you will have the opportunity to get affirmative approval for your correction method from the IRS.

[BG5150]

And, for 2016, you'd use the 2016 ADP (or one of the alternatives CB suggested) and multiply by the comp thru 2/15/16.  If THAT'S no known, you could probably use 2016 comp times 87.5% (or 10.5/12 months).