Employee deferred prior to entry date

Hello.  I have a safe-harbor matching 401k plan where the employee satisfied his one year of employment on 11/3/24.  The adoption agreement defines eligibility as 1 year of service with semi-annual entry dates of 1/1 and 7/1.  This would enter him on 1-1-25.  This created confusion with the plan sponsor and, evidently, the payroll company because they deducted a 401k contribution from his December paycheck.

I am thinking they need to refund the $170 and issue an amended W-2 for 2024.  Is my understanding correct, and if so, does anyone have a better recommendation?

Does anyone know what may happen in an IRS audit if they choose to leave it there and not amend the plan to permit it?  The deposit was made in January 2025.

Thanks in advance for your help!

It sucks but it happens. 
 

Two fixes

1. Refund the money to the participant in 2025 and issue a 1099r. Do not change the w-2.

2. Adopt an early entry amendment under the EPCRS self correction program and document the issue and the fix. This would leave the money in the plan.

Thank you Bill.

A couple of notes regarding option #2 (self-correcting via amendment):

• This option isn't available if the affected employee is an HCE (unlikely, but worth mentioning)
• If the plan is top heavy, make sure to also include the employee for safe harbor matching contributions. Otherwise the plan will lose its top heavy exemption.

Those points aside, the amendment method is explicitly blessed by the IRS so you should have no issues on audit if you use it. See Rev. Proc. 2021-30 app. B 2.07(4)

If this new person is an otherwise excludable employee, as it sounds, they could potentially be excluded from THM requirements.

Likewise, if considering the retroactive amendment, keep in mind that you would need to make sure that the plan was operated that way with respect to all participants (immediate entry rather than first of January/July).

"Likewise, if considering the retroactive amendment, keep in mind that you would need to make sure that the plan was operated that way with respect to all participants (immediate entry rather than first of January/July)."

KEC79, I don't believe this is true. Others can correct me if I'm wrong, but it's my understanding that you can do a retroactive amendment to allow early entry for a specific person (assuming the participant isn't an HCE, which again, is unlikely as C.B. Zeller points out).

I personally have never seen the guidance that allows us then not have to use that one person's age/service history as the "lowest" requirements that typically get applied in 410(b) analysis, though.  That's the magic bullet (which may indeed exist)