Question/advice regarding a paper on ERISA

[Redcloud]

Thank you for that real-world example!

[Renafesq]

 

On 10/7/2021 at 6:39 PM, EBECatty said:

Per 1.415(c)-2(g)(8): Back pay. Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415(c)(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would otherwise be included in compensation under this section.

Hours of service also includes hours for which employees are awarded back pay.

Hi there everyone. I was researching a similar topic regarding correcting via back wages and whether there is also a corresponding correction to the 401(k) plan and stumbled upon this thread. I am wondering if I could get some of you to weigh in on my client's current issue. We have a client who recently discovered that it failed to pay overtime to several employees for 3 years in violation of FLSA requirements.  To correct, the FLSA requires back pay for the missed overtime pay plus liquidated damages.  The back pay will be reported on the 2024 Forms W-2 as supplemental wages.  The employees will receive a 1099 for the liquidated damages. A question arose as to whether the missed 401(k) elective deferrals and employer matching contributions should be made for  the missed overtime pay (which are basically supplemental wages) for 2024 only or whether there is a required corrective contribution for the missed years.  Initially, I recommended a 50% QNEC and a 100% employer matching contribution (both adjusted for earnings).  To me, this would be the conservative approach as the IRS could interpret that this would be correction for the 3 years no contributions were made (other issues arise for terminated employees). However, Rev. Proc. 2021-30 does not provide an approved correction or examples for wages that were not received in the prior years and therefore the elective deferrals and match were not applied.  The only correction that is considered in the Rev. Proc. is when the wages were actually paid, but the elective deferrals and matching contributions were not applied in previous years.

The client's general counsel seems to believe that corrective contribution is the correct approach based on the above mentioned Code section 415(c)(2)(g)(8).  However, I'm now thinking that there is no requirement for a corrective contribution since the wages are now being paid in 2024. I think these wages should be treated as an extra payment in the employees paycheck and, instead, the employer should apply the active participants' elective deferral amounts (deducted from the 2024 payment) and employer matching contributions to their accounts. In other words, treat the back pay similarly to a bonus.  However, the terminated employees would not have any elective deferrals or matching contributions since they are not actively employed and have not completed an hour of service.

Note that the plan  document does not utilize the section 415(c)(2) definition of compensation.