QNEC and Catch-Ups

Employer did not setup payroll correctly for deferrals at beginning of 2023.  I am working on the EPCRS fix.

The scenario:  The employee intends to get to 30,000 deferrals for 2023.  So the employee would likely get full deferrals for 2023 plus a QNEC for the Employer error.  This feels a little funky to me, but I am fine with it otherwise.

I'm not aware of any reduction of deferral limit because the EPCRS fix was done.  Am I missing anything?

Rev. Proc. 2021-30 appendix B 2.02(1)(B)

Quote

(B) Elective Deferral Failures. (1) The appropriate QNEC for the failure to allow an employee to elect and make elective deferrals (including designated Roth contributions) for a portion of the plan year is equal to the missed deferral opportunity, which is an amount equal to 50 percent of the employee's missed deferral. The employee's missed deferral is determined by multiplying the ADP of the employee's group (either highly or nonhighly compensated), determined prior to correction under this section 2.02(1)(a)(ii), by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. In a safe harbor 401(k) plan, the employee's missed deferral is determined by multiplying 3 percent (or, if greater, whatever percentage of the participant's compensation which, if contributed as an elective deferral, would have been matched at a rate of 100 percent or more) by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the 402(g) limit). The corrective contribution is adjusted for Earnings. For purposes of correcting other failures under this revenue procedure (including determination of any required matching contribution) after correction has occurred under this section 2.02(1)(a)(ii)(B), the employee is treated as having made pre-tax elective deferrals equal to the employee's missed deferral for the portion of the year during which the employee was improperly excluded. (See Examples 4 and 5.)

You reduce the QNEC such that the QNEC plus any deferrals actually made do not exceed the 402(g) limit. In essence, the employee would be giving up some "free money" by maxing out.

Thanks, C.B.!!  

I was missing something....  appreciate the help.

What would happen if there was a missed deferral opportunity in January and February and then participant maxed out their deferrals in the remaining 10 months. 

So no QNEC at all is due?  No earnings on what the QNEC would have been?  Does the plan still have to put a written procedure into place to avoid future errors to comply with self-correction?  Or is this not a self-correction even though an error was made?

My situation is really a Failure to implement an employee election.  The failure was that while a deferral was being done, it was the wrong percentage.

It still appears that the total of QNEC plus deferrals are limited to 402g limit.

(5) Failure to implement an employee election. (a) Missed opportunity for elective deferrals. For eligible employees who filed elections to make elective deferrals Page 88 of 140 under the Plan which the Plan Sponsor failed to implement on a timely basis, the Plan Sponsor must make a QNEC to the plan on behalf of the employee to replace the “missed deferral opportunity.” The missed deferral opportunity is equal to 50 percent of the employee’s “missed deferral.” The missed deferral is determined by multiplying the employee’s elected deferral percentage by the employee’s compensation. If the employee elected a dollar amount for an elective deferral, the missed deferral would be the specified dollar amount. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred. The QNEC must be adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

Don't forget this rule, though....page 105 of 140 in Rev. Proc. 2021-30  (it's what BG5150 looks to be asking about):

(F)Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Contributions.  An Plan Sponsor is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions)or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals or after-tax employee contributions under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred.  (See Examples 6 and 7.)

Thanks Bri!