"Employee Elective Deferral Failure" under RP 2019-19

Really splitting hairs here, but...

When looking at Appendix A, .05(9) and (10), let's suppose that everyone has been having deferrals withheld correctly, and all of a sudden, for ONE payroll, everyone who is deferring doesn't have anything withheld on a small piece of irregular (but not excluded) compensation.

If corrected immediately, does this qualify for the "no QNEC" correction? (Assume no match anyway)

While it seems reasonable, I suppose one could interpret the language in (10) that this isn't a "failure to implement" - in other words, it seems like that might be designed more for an INITIAL "failure to implement."

Has anyone seen/heard of the IRS addressing this issue?

Something I ran across while doing a related review.  Basically, yes you avoid the QNEC for the missed deferrals.  See - https://www.spencerfane.com/publication/irs-eases-correction-rules-for-missed-elective-deferrals/

Excepted...

Rolling Three-Month Exception. The Revenue Procedure converts the existing three-month exception into a rolling three-month provision. So long as elective deferrals commence within three months of when they should have commenced – regardless of where that falls during a plan year – an employer need not make up the missed deferrals. (If the affected employee notifies the employer sooner, the deferrals must commence by the last day of the month following the month in which the employer receives this notice.)

This expanded three-month exception does nothing to shield an employer from having to make up any matching contributions that an employee would have received if the missed deferrals had actually been made. Such a corrective match, as adjusted for lost earnings, must be made by the SCP Deadline. And affected employees must be notified of the failure and its correction within the 45-day period described above.

Hope that helps!

This is from the Appendix of 2019-19 which might also help.

(9) 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: Page 84 of 125 (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; (ii) Notice of the failure that satisfies the content requirements of section .05(9)(c) of this appendix is given to the affected eligible employee not later than 45 days after the date on which correct deferrals begin; and (iii) If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the Plan Sponsor makes a corrective allocation (adjusted for Earnings, which may be calculated as described in section .05(8)(b) of this appendix) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan in accordance with the timing requirements under SCP for significant operational failures (described in section 9.02).

There is a seminar that says the above correction applies regardless of the exclusion being a failure to implement the initial election or the failure to apply what was an on-going deferral election.  This is not just for the initial election.  I suggest that the inclusion of "... and a failure to afford an employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan" provides a delineation of failures.  That is, if it was just for the initial election, why does the language in (10) define 2 types of failure with deferral elections.