Missed contribution by employer

Hi,

My employer has a policy that the 401K contribution can be started only after 90 days. I joined on 8/27/2018 and I wanted to maximize my 2018 contribution so I setup 100% deduction in November in preparation of my eligibility starting December 2018 paycheck.

The payroll could not process this election since it got confused with 100% and could not accurately calculate taxes etc. After multiple back and forth with plan and the payroll, the issue finally got resolved only in mid Jan 2019.

Based on this IRS article, it looks like I may be eligible for the fix by the employer and should receive 50% of my missed deferral amount. Is that accurate understanding?

Thanks, Dhaval

The article is very very simplified. For more detailed information, you'll want to look to the actual IRS Revenue Procedure 2018-52. 

https://www.irs.gov/pub/irs-drop/rp-18-52.pdf

If you read it, you'll notice that there are lots of exceptions to the Elective Deferral Failure correction you describe, especially when the time period of the error is relatively short, less than 3 months. (December + January) Even if the failure was longer than three months, a reduced corrective contribution of only 25% of the missed amount is sometimes also permitted. 

So you might not get any corrective contributions. If the plan provides for a match, you should get the match as if the deferral is being made. 

As for a 100% deferral election, they probably figured this out, but because of payroll withholding it's not actually possible. It usually works out to be something like 92% deferral, and the remainder is FICA, FUTA, SSI etc. 

To take advantage of the safe harbor - less than 3 months, the correct deferral amount should have been corrected by the last day of the month following the month the sponsor was notified of the missed deferral.  If supposed to start in December 18, but started in January 19, then that part is satisfied. I believe you should have still received written notice of the failure within 45 days of the start of the correct deferral to meet the requirements under the safe harbor (although the notice of the ability to increase future deferrals is not applicable since already at 100%).  Otherwise, it is 50% QNEC of the missed deferral (plus earnings), plus any missed match (plus earnings).     

Keep in mind, that if there has been e-mail correspondence back and forth about the deferral error, that may meet the notice requirement in aggregate if it covered the required items. I'm not aware of any requirement that the notice be provided on hard copy paper (though it should be given on paper upon participant request). 

Nor am I aware of anything that says the notice has to be a single notice. I would argue that several communications that cover all the required elements of the notice should suffice. 

Best practice would be a single notice that meets the requirements, but depending on what's been communicated, it might not be needed. 

Most employers are permitted an administratively feasible time in which to implement a deferral election.  The IRS article presumes that the deferral election has not been implemented within a reasonable period.  The employer may at least argue that it was simply administratively unable to implement the deferral until early 2019, and that no "correction" is needed.  I am not taking a position either way, just throwing this out there. 

Justanotheradmin - I agree that written notice could be in the form of an email and does not need to be a hard copy mailed out.  I do not believe it says specifically that it needs to be a single notice, but I do think that was the intent of the 45 day notice.  I would not want to have to argue that several partial communications meet the requirements when a simple notice containing all in one would clearly meet the requirements.  With that said, I will use that in the future if I ever have similar facts that backs me into that corner.   

Madison71 - I agree with you. It's not an argument I would want any plan sponsor to make. But if that's the position they take, well, that's up to them.