Employer fails to start and or increase deferrals under an automatic deferral arrangement

We have a plan sponsor who failed to start deferrals at 3% (plan has immediate participation) and has auto-increase (1% per year.)  I don't know how long or how many employees this involves.  We have a conference call Thursday at 10:00 am.  Of course the HR person involved is gone.  I'm thinking the correction is to fund 50% of the missed deferral and/or deferral increase and 100% of the match plus earnings on both.

I almost think I saw someone post on here one time to propose a one-time bonus grossed up for the tax liability.

Thank you in advance for your comments.

Tom

I suggest learning more about the group of employees that had the failure including at what point in the plan year did the failure occur, how long did the failure last, and what is the current employment status of each affected employee.

Part of the decision for which correction is applicable also should consider any requirements to send a notice to participants.

You did not specify that the plan uses auto-enrollment but it is likely it does given how you otherwise described the situation.  There are multiple correction methods which include some very lenient provisions for plans with auto-enrollment, including no funding of the missed deferral as long as the deferrals are started by 9 1/2 months after the end of the plan year in which the failure occurred.

There is a brief exclusion rule - a close relative to the 3-month rule - that also avoid funding the missed deferral if the deferrals are started within 3 months of the beginning of the failure.

There is a reduction of the 50% to 25% if the correction is made within 3 years.

Note that none of these work for individuals who have terminated employment.  The 50% funding will apply to them.

You are correct that any match will be funded at 100% along with earnings.

These comments are in some ways an oversimplification of the rules, so please do some homework before your call tomorrow.  You should have some better news for the plan sponsor.