Failure to Implement Elective Deferral - Impact of Compensation Limit

[Gruegen]

An employee made a 5% deferral rate election effective January 1, 2020; however, due to a mistake in plan operation, this 5% deferral rate was never implemented. This would likely be classified as the "failure to implement an employee's election" for an entire plan year as described in Appendix A.05(5)(a) of Revenue Procedure 2021-30. The Rev Proc states that:

"...the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the “missed deferral opportunity.” The missed deferral opportunity is equal to 50 percent of the employee’s “missed deferral.” The missed deferral is determined by multiplying the employee’s elected deferral percentage by the employee’s compensation."

The plan sponsor normally allows employees to make 401(k) contributions on compensation in excess of the 401(a)(17) compensation limit of $285,000 for the 2020 year (as permitted by IRS Employee Plan News Issue 2012-1). The employee's compensation for the 2020 plan year was $340,000. My question is....is the "compensation" used in calculating the missed deferral $285,000 or $340,000?

As best as I can tell, the Rev Proc does not say that compensation under the corrections in Appendix A or B must limited to the 401(a)(17) limit, and quite frankly, if the plan had been operated correctly, the participant would have had the 5% deferral rate applied to the full $340,000 of compensation. Thoughts?

[BG5150]

Yes, use $340k.  But be mindful of the 402(g) limit and catchups.  So the QNEC is limited to $9,750 (plus $3,250 c/u) no matter what the compensation.

[Patricia Neal Jensen]

I could be wrong, but I know of no application of Compensation which is not limited to the 401(a)(17) limit.  Look at your plan document's definition.

See irs.gov/retirement-plans/401k-plan-fix-it guide-you-did-not-use-the-plans-definition-of-compensation-correctly-for-all-deferrals-and-allocations.

PNJ

[Peter Gulia]

Does this plan’s administration permit a participant to specify her within-a-year elective-deferral salary reductions as a percentage of each pay period’s actual wages, unconstrained by a § 401(a)(17) limit (but subject to stopping or lowering a periodic salary reduction so the sum remains within § 401(a)(17), § 402(g), and other limits and constraints)?

For a correction, might one treat an election of 5.00% of $340,000 (if the plan allowed that) as an election of 5.96% of $285,000?