What happens if a participant elects to defer 8%; however, the company

[Guest Tracy H]

What happens if a participant elects to defer 8%; however, the company only withholds at a rate of 2%? This was found 15 months late. If the correct rate was input, the participant would have deferred an additional $1,800. What liability does the Employer have? I'm assuming they should at least match at the higher rate, but shouldn't the employee have some responsiblity? Do they need to "fund" the employee deferral portion?

[Kathy]

Participants have to start taking some responsibility for checking their statements a little more frequently than every 15 months!!!! I don't think you are required to go back and correct for a prior year for which the participant has received a final statement. ERISA requires that they get statements at least once a year. I believe that if they haven't notified you of an error within a resonable time after receiving the statement, it is as if they are approving of the salary deferral that was actually made, accepting it rather than the amount they originally requested. I don't see any need to go back an make a matching contribution on something they didn't contribute. After all, this participant probably got pay stubs showing the contributions each pay period as well as plan account balance statements. Furthermore, under a 401(k), you cannot defer income once it has been received so you can't go back and put money in for the prior year and, if you decide to make some sort of correction in the current year, you'll have to keep in mind the current year 402(g) and 415 limits.

I highly recommend putting some sort of a disclaimer on the statements indicating that errors must be brought to the attention of the administrator within 90 days or the information will be treated as being correct from that point forward.

[Jon Chambers]

Beg to differ, and apologize for being conservative, but I think that the IRS would say that the participant's responsibility is to make a valid salary deferral election, and that the employer's responsibility is to implement the election. Since the employer failed to fulfill its responsibility, the employer should make up all missed deferrals, plus any applicable matching, plus investment earnings that would have been earned. I believe this is correctible within the APRSC standards, and there may even be an example in the regs (attorneys--comments or cites).

From an internal control perspective, you may want to check how it is that the deferral elections weren't processed properly. Keypunch error? Improper internal review? The purpose is to ensure that this is an isolated instance, and isn't repeated.