401k Deferral or Corrective Contribution or Unallocated Suspense account?

Facts:

401k Safe Harbor with Cross Tested Profit Sharing.

Employer formed LLC effective 1/1/2021, was sole-prop for 20+ years prior to this.

First payroll date was technically 1/12/2021, with bi-weekly payroll thereafter, however, the new LLC bank account was not yet established so all employees were paid a reasonable "Advance" on 1/12/2021 equal to estimated pay (estimated hrs * hrly rate reduced for estimated taxes etc). All employees are hourly paid. It should be noted the 401k estimated deferrals were not remitted over to the plan at this time. The plan was to reconcile all with the 1/26/2021 pay date, in the new LLC account with the new system being implemented.

Thereafter the new LLC business account was established, new system set-up, and the first official payroll was processed for 1/26/2021 pay date. With this payroll, the bookkeeper logged all hours year to date (i.e. including hrs for pay date 1/12) making gross wages correct for year to date (both 1/12 and 1/26). Taxes and 401k* were determined, the "1/12/2021 advance" figures reflected,  and the resulting net pay to employee determined. *Herein lies the problem: only 1/26 pay date's 401k amounts were accounted for, missing were the 1/12/2021 amounts. Total 401k reported as of 1/26/2021 $956.25 -- this amount was short by the 1/12/2021 payroll's total 401k withholding $922.50.

Good news/bad news: The bookkeeper caught her mistake when she remitted the deposit over to the Plan and deposited $1,878.75 -- 1/12/2021's $922.50 plus 1/26/2021's $956.25. (This 1,878.75 matches the employee deferral elections in place and gross wages paid.)

Only problem was she never went back into payroll and made adjusting entries to "account" for the correct 401k amounts remitted over to the Plan. Therefore, the three participants affected received the $922.50 in their net pay (i.e. in their pocket). Because of this the W2s are correct as issued.

Questions:

Can the $922.50 be deemed an employer corrective contribution and a notice issued at this time, or, should it be considered an "unallocated suspense" amount to be applied at a later date? My concern with the former is that it is more than the prescribed correction -- is this acceptable (can correction be more than guidance prescribes) or is it prohibited?? And if the latter, can the employer apply it towards the 2021 Safe Harbor (3% non-elective) contribution to be deposited by 10/15/2022?

If the $922.50 can not be deemed an employer corrective contribution at the time is was deposited, a correction is needed for the missed deferral opportunity (1/12/2021 pay date). Is it the missed known amount per participant or 50% of the average NHCE deferral rate?

All employees are still employed; no Correction Notice has been distributed. It is a balance forward plan.

Thank you so much.

Please allow me to simplify the above and ask again:

The employer under withheld 401k in the month of January 2021 by $922.50.

The employer caught its mistake when depositing the January 2021 deferrals in January 2021 (i.e. immediately). EPCRS correction would be a QNEC = 50% of the known missed deferral however the employer deposited 100% of the missed known deferrals.

Question: is it okay that correction was more than the EPCRS correction? There is no interest adjustment for lost earnings since the correction was deposited when the deferral deposit was otherwise due.

The $922.50 should remain deferral monies, that was the respective amount from the 1/12 estimated payroll.  It doesn't not become deferrals merely because the '21 W-2 were incorrect as a result of the excess payment through payroll.  Normally, a deposit following 1/26 would be more than 7 business days after 1/12 and therefore you would have a late deferral situation.  However, the caveat is that the clock starts when the deferral can be segregated from the general assets of the employer, and without the bank account, and without the payroll calculation of the actual deferral amount, I would argue that the segregation date is therefore 1/26; and if deposited immediately thereafter, even the 1/12 amount is still timely.

Sounds like the Plan is fine, I think you have a box 12 error on the w-2.

4 hours ago, Nate S said:

Sounds like the Plan is fine, I think you have a box 12 error on the w-2.

Thank you so much Nate.

Regarding the quoted text, even though the Participants received the $922.50 in their take home pay (since never recorded in payroll system)?

Yep, from your narrative it sounded like payroll didn't know to reduce the net payroll by the 922.50 that was withheld for deposit to the Plan and instead called for it to be paid.  So Box 1 should be correct vs the take home payments and income tax withholding; while box 12 is understated by the amount it didn't know was supposed to be withheld.