Deferral elections not applied to bonuses

I've got a client who paid out their first bonus in a long time... and totally forgot that bonuses are subject to the same deferral election as 'regular' compensation, so he didn't do any withholding.  So the employees have compensation paid in 2017 (reported on the 2017 W-2) that didn't have deferrals taken from it where there was a valid deferral election in place.

What's the best fix?  If this was in the same plan/tax year, I'd consider letting him 'make it up' on the next payroll, but I'm concerned that going over the year will be a problem.  I was reading this nice article, and I was thinking that the option on the 3rd page of the chart applies, but no penalty other than earnings seems like a pretty light way to get out of this...

Thanks.

I would refer to thhttps://www.irs.gov/retirement-plans/401k-plan-fix-it-guide IRS 401k fix it guide.

The Fix-it Guide is what confused me! LOL  I started with Mistake #3 (not the Culture Club song, for any other fans of 80's music):

3) You didn't use the plan definition of compensation correctly for all deferrals and allocations.

Under this section is the expected 50% QNEC, and then it says to see Mistake #6 for ways to reduce that to 25%.  That sounds like something my client would be interested in, so I head over there...

6) Eligible employees weren't given the opportunity to make an elective deferral election (exclusion of eligible employees).

This actually doesn't meet the criteria for reducing to 25% because the period of failure does not exceed three months.  Fine.  But then it goes on to say...

If the period of failure is less than three months, no corrective QNEC for the missed deferral opportunity is required.

Is this solely for an exclusion of eligible employee problem problem, or can this sentence be applied to my situation?  I don't think it can, honestly, as it seems too good to be true, but I figured I'd get some confirmation beyond a 'gut feeling'.

When was the bonus paid? If they didn't give a notice of the error to the employees within 45 days, I believe they are subject to the old correction rules -- 50% QNEC plus full match (if any) plus lost earnings.

1 hour ago, AlbanyConsultant said:

Is this solely for an exclusion of eligible employee problem problem, or can this sentence be applied to my situation?  I don't think it can, honestly, as it seems too good to be true, but I figured I'd get some confirmation beyond a 'gut feeling'.

The fix-it guide does make it a bit unclear! I'd refer to RP 2015-28 instead. An "Employee Elective Deferral Failure" is defined in 3.04 and includes situations where elective deferrals were not correctly implemented, not just employees excluded improperly.

3.03 describes when the reduced QNEC can be used. Roughly, the "no QNEC needed" applies if the period of failure is less than three months, and the 25% QNEC applies if the period of failure exceeds 3 months but does not extend past the SCP correction period for significant failures. Participant notice is required and any matching contributions owed would need to be paid, along with lost earnings on both pieces (QNEC and match).

If this is a plan on a prototype document, you may want to (unless you already have) check the basic plan document to ensure there isn't special rules on deferrals of bonus amounts.   I have seen wiggle room in some basic plan documents permitting the requirement of a separate election for bonuses as long as applied to everyone.

Its kind of an oddity to me because the Rev. Proc. provides that to take advantage of the missed deferral safe harbor - within 3 months (or sooner if the month following if notified by the participant)- no QNEC and full match (if any) plus lost earnings if correct deferrals begin along with a notice issued to employees within 45 days of the correct deferral percentage started.  The deferral percentage is correct, but it did not include the bonus compensation.  Therefore, I would tend to agree with K2 that the notice would have to be sent out within 45 days of the employee elective deferral failure - i.e., when the bonus was paid without deferrals being taken out. There is also a safe harbor beyond 3 months as noted above, but it is still going to come down to the 45 day notice requirement...so not really applicable here.