Missed Deferral Opportunity- no other members of employees group

[PMZJohn]

NHCE Participant in a small, successful office where all other employees are HCEs. Eligible for entry into the 401k Plan in July 2022.  Terminated employment in October 2022.  Participant claims they were never offered the opportunity to participate in 401k.  No automatic enrollment, Safe Harbor Non-Elective contribution was made for the participant for the Plan Year.

IRS Guidance says correction is a QNEC for 50% of the missed deferral, calculated on ADP of other NHCEs and applied to their compensation from the period of time in which they were excluded.  How do I calculate that amount if there are no other NHCEs?  Do I use the ADP for the HCEs, since they are the only group?  Or is there a Safe Harbor percentage that I would use?

[Bri]

If it's a safe harbor 3% nonelective plan, I believe EPCRS says to use 3% as the makeup QNEC.  (Looking at page 85 of 140 in RevProc 2021-30 while typing this)

[PMZJohn]

Found the answer on page 84, which I had skipped over initially because it starts out talking about Safe Harbor Matching, so I had (incorrectly) assumed that the entire paragraph was relating to Safe Harbor Match.

"If the employee was not provided the opportunity to elect and make elective deferrals (other than Roth contributions) to a safe harbor § 401(k) plan that uses non-elective contributions to satisfy the safe harbor requirements of § 401(k)(12), then the missed deferral is deemed equal to 3 percent of compensation. In either event, this estimate of the missed deferral replaces the estimate based on the ADP test in a traditional § 401(k) plan."

Page 85 looks like it covers Automatic Contributions, SHNEC contributions not made (which is not the case here), and after-tax contributions.  Thanks for pointing me to the right answer.

[Belgarath]

You may want to take a look at IRS Notice 2024-2. I haven't read it in-depth to apply it to a specific situation that you describe, but I almost think that my initial skim read it providing for using the safe harbor correction in RP 2021-30, for the lower QNEC amount, even for a terminated participant. Not sure about that, however, you'd want to read it thoroughly!

[cathyw]

Can we take this scenario in a slightly different direction?  What if the only participants previously were owner and spouse, neither of whom make a deferral contribution for the year.  The plan is not safe harbor.  It turns out that because of a recently discovered ASG situation, 3 NHCEs of a member of the ASG have to be covered for 410(b) purposes.  Under the 11(g) regs, coverage should be corrected by retroactive amendment and a QNEC equal to the ADR of the NHCE group.  How do you determine the QNEC when there's no ADR for either HCEs or NHCEs for the year? 

There's also a cash balance plan affected.  These NHCEs will be retroactively covered, provided with a meaningful benefit under (a)(26) and receive profit sharing contributions in order to satisfy (a)(4) on a combined basis.  But how to correct the 401(k) component?