Trying to figure missed deferral

Employee went on line at investment company and made a positive election to have a Pretax deduction of  $100 per pay, starting  10/1/2016.  Some how this never went to our payroll system.  We just found it last week and started deducting 2/23/2018.

I think the QNEC correction would go like this.

50 percent or $50 per pay from 10/1/2016 to 12/31/2016.

25 percent of $25 per pay from 1/1/2017 to 11/30/2017.

Zero for the last 3 months, 12/1/2017 to 2/23/2018.

What do you all think?

I don't think you get a break for the last three months. It was not corrected within three months so you lose the "Get Out of ERISA Jail Free" card. I may have misread it, though. https://www.irs.gov/pub/irs-drop/rp-15-28.pdf 

Revenue Procedure 2016-51, Appendix A.05(a):

Safe harbor correction methods for Employee Elective Deferral Failures in § 401(k) plans or 403(b) Plans. (a) Safe harbor correction method for Employee Elective Deferral Failures that do not exceed three months. Under this safe harbor correction method, an Employee Elective Deferral Failure (as defined in section .05(10) of this appendix ) can be corrected without a QNEC for missed elective deferrals if the following conditions are satisfied:

(i) Correct deferrals begin no later than the earlier of the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee or, if the Plan Sponsor was notified of the failure by the affected eligible employee, the first payment of compensation made on or after the end of the month after the month of notification;

In your example, since you are within the SCP period, I think it should be 25% across the board, if you comply with the notice requirements, etc., plus of course full appropriate matching if applicable, and earnings. Also see examples from the IRS fix-it guide. Example 2 is included because it contains data for example 3, which appears to be the appropriate example for your situation.

Example 2:
Corporation XYZ maintains a calendar year a 401(k) plan that contains automatic contribution features. In this case, all employees in the 401(k) plan automatically have salary reduction contributions of 3% of compensation withheld from their pay. Participants may decrease or increase this amount by filing an affirmative, written election. In 2016, XYZ realized four employees hired in June of 2015, were improperly excluded from the plan due to an administrative error. XYZ discovered the failure in 2016 and auto-enrolled the employees in the 401(k) plan as of April 1, 2016, and began withholding 3% of their compensation as salary reduction contributions to the plan. On May 1, 2016, XYZ issued a special notice to employee that satisfied the content requirement specified in Rev. Proc. 2016-51, Appendix .05(8). XYZ does not have to provide a corrective contribution for the missed opportunity to make salary reduction contributions due to the employees’ improper exclusion from the plan in 2015 and first three months of 2016. The conditions of the Appendix .05(8) safe-harbor were met when:

• Improperly excluded employees were enrolled; special notice provided within the applicable 45 day period; and
• The above actions occurred within 9 ½ months after end of the plan year which the failure first occurred (i.e., before October 15, 2016); and
• XYZ is still responsible to pay corrective contributions to the 401(k) for any 2015 or 2016 matching contributions or employer contributions, if applicable, that the employees would have been entitled to under the terms of the 401(k).

Example 3:
Assume the same set of facts, except that the terms of XYZ’s 401(k) plan did not provide for automatic contribution features. Assume the excluded employees become plan participants on April 1, 2016, and at that time were given the opportunity to participate in the 401(k) plan. XYZ issued the special notice on May 1, 2016. Under these facts, the lost opportunity cost for the missed deferrals would be 25% of the missed deferral amount for 2015 and first three months of 2016. Adjust this amount for earnings through the date of correction. This is permitted because XYZ complied with the special safe harbor requirements in the Appendix A.05(9) safe harbor discussed in Rev. Proc. 2016-51. XYZ would still owe 100% of any owed corrective contributions associated with matching or non-elective employer contributions, if applicable, and all corrective contributions would have to be paid to the plan before the end of the second plan year beginning after the initial year of the failure.