Employee thought they were participating... for 3 years

I received an email from a client over the weekend.  An employee thought they were participating in the plan, thought deferrals were being taken and thought they were getting the 5% match.  This employee did notice that nothing was being taken from  their check... didn't see the deferral on the W2.. and is still crying foul.  Paperwork was provided to her be she never completed and returned it.  The employer is willing to make her whole in some way.  What is the best way to handle this?  

edit:  I read that a QNEC can be made on behalf of the employee.  If that is the answer, do I need to go back and issue one each year, amend each year's 5500?  OR, can it be done all in one year and only amend the last 5500?

Damn, another edit:  The IRS link I am looking at states that the correction QNEC would be 50% of the ADP.  So I need to determine what the ADP/2 is and that would be the corrective QNEC.  It is a SH Match plan we need to make that contribution as well I would think.. right?

Thanks

It would be helpful to more about the plan design, the communications the employee received, and any documentation about when the employee became aware that deferrals were not being taken.

From the perspective of the employer, generally the employer is on the hook for a correction if there was a missed deferral opportunity or a failure to implement deferrals after an employee elected to start deferrals (or should have been auto-enrolled).  A missed deferral opportunity would be where the employee was eligible to defer but her eligibility to defer was not communicated to her.  The failure to implement would be where the employee notified the employer that she wanted deferrals to begin and the employer did not implement her instructions.  In each case, the employer will have an obligation to take the required corrective actions.  The corrective actions will depend upon the facts of the situation and the type of mistake, and the employer should not take any corrective actions that are not among the actions prescribed in regulations.

If the employee properly was informed she was eligible and did not make an election, and if the employee did not notify the employer that she made an election (or should have started auto-enrolled deferrals), then the employer does not have obligation to make her "whole in some way".  There are not prescribed corrections for an employee who would-a, could-a, should-a make an election and did not tell anyone.  The employee is accountable for the consequences of the employee's irresponsibility and inaction. 

Arguably, if the employer puts money into the plan to "make her whole in some way" and the employer was not at fault, then the employer potentially is making an impermissible contribution to the plan.  This possibly could result in adverse consequences for the plan or the employer.

Short version of all of this is if the employer failed to do something, follow the required corrective actions.  If the employer did not fail to do something, do not involve the plan in any plan to "keep the employee whole."

So the employee thought they had turned in a deferral election? but didn't?

It doesn't sound like a plan error. 

It sounds like the employer needs to decide if they want to do something to make the employee happy. Perhaps give them a bonus and they can turn in a deferral election now to defer most of the bonus. For morale purposes. But not because the plan needs correction. 

I don't see how a QNEC would be appropriate since there is nothing on the plan side to fix. 

Thank you both for responding.  

16 minutes ago, justanotheradmin said:

So the employee thought they had turned in a deferral election? but didn't?

YES, that is what happened... in a way.  She was give the deferral form but never turned it in.  And of course the EE feels jipped.  The plan sponsor is such a good guy and want's to make it up to her to keep her happy... doesn't want a thorn in his side.  It sounds like the plan doesn't need to do any corrective measures.  It sounds like the best course of action is to make her whole outside the plan with a bonus  and she can turn around and defer it into the plan.  Case closed.  

Sound like a plan?  

Be mindful of precedent setting.

Yes!  I will point that out to him.

I told the employer that the best solution is to fix this "outside" the plan.  I also told him to press to this EE that SHE dropped the ball.  I know him, he is a super nice guy.  He will give her a bonus and let her defer it into the plan to make up for her error.  

Thanks for the responses!

That is the best solution, and you got great advice above - fixing a plan error that didn't exist in the first place by doing something not otherwise supported by the plan document creates a plan error. 

We've had other discussions in this forum over the years about employee accountability, so I'll reserve opinion on that.

43 minutes ago, CuseFan said:

That is the best solution, and you got great advice above - fixing a plan error that didn't exist in the first place by doing something not otherwise supported by the plan document creates a plan error. 

We've had other discussions in this forum over the years about employee accountability, so I'll reserve opinion on that.

I agree that it’s a better solution but I don’t like it. It’s only better because it’s outside the plan.

The client is going to bonus the participant outside the plan.  I expressed to him that the plan did nothing wrong.  I don't know the employee... maybe they are good at their job.  He want's to just keep the peace.

My opinion CuseFan, she has gall to go to her boss and say that "HE" messed up.  I have had ZERO problems with the office manager or bookkeeping/payroll over the years.  They have been thorough to a "T", always providing clear accurate info in a timely manner whenever asked.... and they pay their bill very quickly!  This is a lesson for them... they won't let it happen again. 

Thanks everyone for your help! 

Good to also start a practice of getting an election form back from every new participant, even those electing 0%.

18 hours ago, Gilmore said:

Good to also start a practice of getting an election form back from every new participant, even those electing 0%.

Yes, as indicated by checking this option...   [   ] I do not wish to have deferrals withheld from my wages and contributed to the Plan.

Good advice above.  I absolutely agree with obtaining an election from every employee, including elections for "0".  In 403(b) we have universal availability which can (does) require proof of having informed an eligible employee, but good advice for 401(k), too.  What if this employee had come back and claimed that she never received the information or the form?

21 hours ago, Basically said:

My opinion CuseFan, she has gall to go to her boss and say that "HE" messed up.

Totally agree. Just didn't want to go down that rabbit hole again ranting about employee accountability and how (not just here, but many other cases discussed here) it is mind boggling that someone doesn't notice or doesn't say something when something that is supposed to affect their pay and doesn't. But if double health plan premiums were withheld by mistake you can bet they'd be in HR the next day!