An employee signed up for the 401(k) plan in 2002, and deferred 10% of pay.

For some reason in 2003 and so far in 2004, the employer did not withhold the deferrals from the employees paycheck. Now, in 2004, the employee , brings this to the attention of the employer.

What course of action is the employer required to take? Must the employer make a special employer contribution for the employee in the amount of what the deferrals and match would have been, adjusted for gain or loss ?

Or was it the employees responisibility to bring it to the attention of the employer at an earlier date?

The IRS would consider this an employer problem that would require a contribution equal to the amount of the employees election and as adjusted to reflect the gains / losses the employee would have incurred had the employer timely withheld.

P.S. - if you want a reference for the employer/accountant, you could refer them to Rev. Proc. 2003-44, Appendix A, (.05).