Correct year for deferrals to apply against 402(g) limit

I have a client that maintains a 401(k) plan with 500+ lives.  The plan assets are with a large insurance company who also provides the TPA services.  The insurance company just notified the sponsor that 8 people violated their 402(g) limits.  Corrections were not made by the April deadline as the sponsor's accounting department tracks annual deferrals and, according to their records, no employee was over the limit (except for eligible catch-up contributions).  The sponsor provided their calculations to the TPA and asked why the TPA was getting a different answer than they got.  It turns out the TPA was treating the first pay date in 2022 as 2021 deferrals and the first pay date in 2023 as 2022 deferrals.  Using this calculation method, the TPA came up with the excess deferrals.  The pay dates in question did represent the payment of wages for a pay period that ended in the prior year (paid on 1/5 for pay period ended 12/31).

The pay and deferrals for the 1/5 pay date is reflected on the employees W-2 for the calendar year in which the pay was received by the employee (i.e., 1/5/23 pay and deferrals are reflected on the 2023 W-2).

Per my reading of Tres. Reg. 1.402(g)-1(b), I interpret the definition of an elective deferral for 402(g) purposes to be an amount that would be taxable in the year, except for the fact that it was an elective deferral into a 401(k) plan (SARSEP, SIMPLE, Roth, 403(b) as well).  If I am interpreting that correctly, a deferral from a 1/5/23 paycheck would have been taxable compensation in 2023, except for the fact it was deferred into a 401(k) plan, and thus it counts as an elective deferral for 2023 for 402(g) purposes.  Not 2022 as the TPA is contending.  Am I missing something?

Thanks in advance for your help.

IMO everything ties to the paydate, not the payroll ending date. (And I don't think it is just my opinion; you provided the cite.)

The thing I find really odd about this is the extra work they must have gone to to come up with this result. I mean, we would just compare the payroll reports to the deferrals. They are apparently adding and subtracting to get their numbers, which is downright baffling but then again nothing surprises me too much.

Unless...whoever entered the deferrals used the pay period ending dates instead of the payroll dates. OK, if so, that just gets corrected and you move on. (And if that is indeed the case, then the TPA should have figured it out. Again, nothing surprises me and "large insurance company" is a red flag. Often wrong but always arrogant.)

The debate over how to apply plan year limits when a payroll period spans the end of the plan year keeps coming up when situations like this one comes up.  At the end of the day, a plan can pick a method and apply it consistently from year to year.

Some thoughts:

• The application of limits to plan year should be consistent with the reporting of the deferrals and compensation for a plan year.  In this case, it the deferrals and related compensation are reported on the 2023 W-2, then the they should be included in the application of the 2023 deferral limit for the 2023 plan year.  This policy should be followed for each plan year.
• Just to be overly technical, if the situation was the company payroll took deferrals in excess of the deferrals limit, then this is a 401(a)(30) violation that should have been corrected by the April 15th following the end of the plan year.  If a 401(a)(30) violation is not timely corrected, then the plan would need to file a VCP.  The company was aware of its responsibilities and appropriately monitored the limits. 
• If the TPA's service agreement said it would monitor the limits, the service would have value only if the issue was raised in time to make a correction by April 15.  This thought also is applicable where the participant (not the company) was responsible for a violation of the 402(g) limit.
• The TPA has no regulatory authority over the plan.  The TPA can point out what it thinks is an issue and can work with the plan to research the issue, but the TPA does not get to force its opinion on the plan.  Any service provider that thinks otherwise can be replaced.

Never used it, but some plans have an option for a "first few weeks" rule.  Not sure if that is what they are looking at.  That would be in the plan document.

Similar, Insurance company refunded contribution for the two principal of an LLC taxed as a partnership, which was on extension.  Two deferrals made in one year, one for 2021, the other for 2022.

Is it not the case that as long as a deferral election was signed prior to 12/31, the partners have until the due date of the business tax return to make their contribution, this includes deferrals made by the partners?

Of course they could claim this contribution was coded incorrectly and should have been coded as a prior year contribution; or else coded as a profit sharing receivable.

Or, are we off base here???

1 hour ago, thepensionmaven said:

Is it not the case that as long as a deferral election was signed prior to 12/31, the partners have until the due date of the business tax return to make their contribution, this includes deferrals made by the partners?

Their deferrals need to be funded as soon as it can reasonably be done once their self-employment income is determined. In other words, this is tied to their personal tax filing, not to the business's due date. Their personal tax filing deadline (including any possible extensions) is the latest possible date those deferrals can be deposited -- it is not quite as simple as "they have until that date". The usual rules on deposits being required as soon as they can reasonably be segregated from general employer assets still applies here.