Correction for excluding an eligible employee from a safe-harbor 401(k

[John A]

How should the exclusion of an eligible employee from a safe-harbor 401(k) plan be corrected? Which IRS correction program should be used (APRSC, VCR)?

[MR]

I would suggest self-correction by having the employer make a qnec equal to the sum of 1.) the average 401(k) contribution of the other NHCE's (assuming the forgotten soul is NHCE), plus 2.) the safe harbor contribution percentage (ie 3% of pay).

For example, if the ADP of the NHCE's is 4 percent of pay, I would have the client make a qnec equal to 7 percent of pay.

[John A]

MR, I agree that your suggestion would certainly be an acceptable approach. However, it seems to doubly penalize the employer for having a safe harbor plan. If the plan were not a safe harbor plan, then Rev. Proc. 2000-16 makes it pretty clear that the correction would be to contribute the ADP for NHCEs or HCEs (whichever is applicable). So it seems like it should be enough to contribute the ADP without additionally contributing the safe harbor nonelective contribution. Alternatively, since it is the safe harbor contribution that enables the employer to not have to calculate the ADP in the first place, it seems like it should be enough to just contribute the safe harbor nonelective contribution.

Any other votes for:

1) ADP plus safe harbor

2) ADP only

3) safe harbor only

4) other?

[R. Butler]

I agree with MR. Rev. Proc. 2000-16, Section 6 is clear that a complete correction requires that the participant be put in at least the same position that he/she would have been had the error not occurred. The only way the participant can be made whole is to make both the ADP plus the safe harbor. Clearly the safe harbor must be made, else I wouldn't think it would even meet the safe harbor requirements because all eligible employees didn't get the required contribution.

[Alf]

I assume that the eligible employee who was excluded did not receive the required safeharbor notice. If that is the case, I think that there is really serious question about whether or not this plan will have to pass ADP testing after the correction. I am not aware of any official guidance on what happens to a plan that does not satisfy the safeharbor requirement that each eligible employee has to receive a safeharbor notice. Just because you follow the 2000-16 correction and contribute missed deferrals and the nonelective contribution that was missed doesn't necessarily mean that you have corrected your failure to follow the safeharbor notice requirements. Until guidance on this point comes out, I would recommend a VCR filing so that the IRS can approve of the correction.

[R. Butler]

Good point Alf.