Missed Deferral Correction For Terminated Participant

[LeesuhOB]

We have a client who needs to correct a missed deferral opportunity.  The error occurred last year over the course of three payrolls.  The plan has auto-enrollment and therefore qualifies for the safe harbor correction method.  This issue is that the participant is terminated and will not receive compensation any longer.  Because the regulations state that:

The plan will correct the deferrals by the first payment of compensation on or after the earlier of:

• 9 ½ months after end of Plan Year when failure first occurred
• Last day of month following employee notification of error

Can the plan use the safe harbor method and not make the QNEC even though the participant will not receive compensation?

[Gilmore]

Ilene Ferenczy has a nice piece on her firm's website ("solutions-in-a-flash") on this topic.  It was prepared in August of last year.  It was one of the first pieces that I read that confirmed that if a participant terminated before the correction is made the traditional QNEC correction must be provided to that participant.

[EBP]

In order to use the safe harbor correction method in EPCRS Appendix A, ALL of the following conditions must be satisfied (conditions greatly abbreviated and simplified):

1.  correct deferrals begin

2.  notice is given

3.  corrective allocations are made

Since the participant has terminated employment, you can't satisfy #1, which means you can't satisfy #2 either. Since you don't satisfy all of the conditions, you can't use the safe harbor correction method. 

[LeesuhOB]

Thank you.

[Bri]

And there's no defense for suggesting the correct deferrals began properly at $0 after the termination? 

(Notice is easy enough, although might cause head-scratching for an ex-employee....)