401k correct fix for example below

[HRagain]

Glad to be back though under another name because I've switched employers a few times and I totally forgot my old username, but I know this is at least a 3rd one *Ü*. I am NOT the plan administrator here, but have 25+ years (back to the non-mutual fund quarterly stone age on recordkeeping of 401ks).  I have not kept up 100% with what type of corrections are required, so bear with me on these details. Sorry this one is a little long!

Participant became eligible to participate on 11/1/25.

Participant chose 6% Pretax Deferral that came with 4.5% Employer Match (with a 5 year cliff vesting schedule) along with receiving a 3% Safe Harbor contribution each pay period (there were 4 left in 2025).  Each pay period had the same amount of Plan Eligible Compensation (basically gross salary without bonus or GTL imputed income) and the same amount of deferrals and contributions.

When compliance tests were run, somehow the recordkeeper forfeited a small amount of Employer Match and Safe Harbor for 2 employees (the other was eligible on 3/1). One of them being myself. I only noticed when I went into the employer system on 5/6/26 and saw 2 (albeit small) withdrawals on 4/13/26.   I requested an explanation from our internal plan administrator (who reviewed the compliance process/testing and reports and approved these withdrawal/forfeitures) and got told to "reach out to the recordkeeper for clarity. There is nothing we in (dept) effectuated here."   I spent 2.5 hours on the employer's site  and speaking with 3 people at the recordkeeper (that I have access to since I am the HR Manager and know a lot about benefits, etc. My CEO agreed to that access when I started although I play no part in recordkeeping/auditing/etc)

So I dug...of course I did LOL!  I found that both withdrawals were forfeited amounts plus associated earnings, which was odd since the contributions exactly matched the calculations against my pay each pay period that came from payroll to the recordkeeper.  I also found the confirmation form where the department approved these withdrawals the same day they got the compliance report (so no one in that dept questioned it then).  I then figured that it had to be based on eligible pay being somehow incorrect.  So I sent that department another email with my findings an got told "It does stink that money is taken from us".  I had to escalate this to my CEO with the threat of a formal DOL participant request for the CEO to go back to this department head to actually have them review anything. And lo and behold the eligible pay was incorrect.  Shock, I know!  They claimed they did full year pay and subtracted out 9 months from a prior pay system (which had its own issues) and then 1 extra month's pay to get to 11/1. Not sure why they didn't just add up the 4 pay periods that counted as eligible 401k plan compensation.  A few employers ago, I had 3 eligible compensation calculations depending on employee service with at least 2 changing on their anniversary date.

In the end, on the 5/15/26 payroll submission, that dept added those two amounts in with current SH and ERM (such that now payroll doesn't match the recordkeeper for 2026 and these two will be overstated in the 2026 compliance records or at least won't match between payroll and the recordkeeper).  And I didn't get the miniscule interest back nor interest from 4/13 to 5/15.  Not that it would be much.

In the end, my question is did something change on how corrections are completed? Is this now how "corrections" are done?  Would it not be "cleaner" to have the recordkeeper reverse the two participant ERM/SH forfeitures and put the earnings back at least for that time period? Because it still shows as a forfeited withdrawal on 4/13 and an increased contribution for 5/15....

That said, neither of the two participants received the letter(s) from the recordkeeper nor did the dept even tell us that they had approved these (albeit small) withdrawals. So had I not been vigilant I think it never would have been found!

Am I wrong to think (1) it should have been communicated when approved to withdraw - wouldn't most internal plan administrators give the employees a heads up  and (2) I should have gotten the original earnings back along with another month's earnings?  I'm not going to press the 2nd but wanted to confirm my thought process.

How come crazy things always seem to happen to be something I find (this isn't the first with payroll/the old payroll system and my own personal information - not as HR Manager)?

[BG5150]

I didn't even realize 5 yr cliff vesting was allowed in 401k plans any more.

 

[CuseFan]

It isn't. DCPs must have vesting at the TH schedules or better - 3-year cliff or 6-year graded.

[Paul I]

@HRagain you have had a lot going on with your account and unfortunately have been left on your own to try to sort it out.  

It sounds as if the trouble started in November 2025 with an error in calculating your deferrals and safe harbor match due to a miscalculation of your eligible plan compensation.  If there was a shortfall in these contributions that was not funded until a later date, then these could be considered late deposits requiring at least an adjustment for lost earnings.  If so, then determining how much is going to depend on plan features such as auto-enrollment.

The forfeiture of amounts due to an error in the compliance test results and the approval of the forfeitures by the internal plan administrator is a separate issue.  Once the error was discovered and a restoration was made to your account (presumably from the forfeiture account), then you should have been credited for lost earnings.

The amounts in question are relatively small, but the size of the amounts is not relevant in the context of there have been operational errors in which both the internal plan administrator and the recordkeeper appear to have played a part.  Other plan participants may have been affected by these and other issues (including the CEO) and they may have not known to question what has happened in their accounts.  

You may want to suggest to the CEO that the plan should undergo an operational and compliance review by a third party covering a couple of years and definitely including the year in which the payroll changed systems.  The review may seem pricey, but if there are issues, it will be a lot less expensive than having the DOL investigate or the IRS audit the plan.