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Serena

Aug 30 2010, 03:06 PM

Employer due to payroll glitch missed withholding deferral contributions for a couple employees. So we know how to self correction which per EPCRS is to contribution 50% of the missed deferral election - they participants had a deferral election in place. However when this contribution is submitted to the plan, is it a QNEC or is it a deferral contribution?

Thanks!

Sieve

Aug 30 2010, 04:13 PM

QNEC. (See EPCRS, Rev. Proc. 2008-50, Appendix A(.05).)

fiona1

Aug 31 2010, 11:00 AM

Does the QNEC for the lost opportunity count towards the 402(g) limit?

For example - assume John is eligible for the plan on 1-1 and elects to defer 8%. The plan sponsor forgets to process the election until March 1st - and it's not noticed until November of that year. Well in the meantime, John has deferred 16,500 from 3-1 to 11-1. Can he receive a corrective QNEC for the lost opportunity from 1-1 to 3-1?

Sieve

Aug 31 2010, 12:39 PM

Yes, the QNEC counts towards the 402(g) limit:

" . . .The missed deferral is determined by multiplying the employee’s deferral percentage by the employee's plan compensation for the portion of the year during which the employee was improperly excluded. . . . The missed deferral for the portion of the plan year during which the eligible employee was improperly excluded from making elective deferrals is reduced to the extent that (i) the sum of the missed deferral . . . and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). . . ." (EPCRS, Appendix B, Section 2.02(1)(a)(ii)(B)(2).)

But, as an aside, correction for a missed elective deferral opportunity is not necessary if the employee has the chance to defer for at least 9 months of the plan year (say, 3/1-12/31 in a calendar year plan):

" . . . An employer is not required to make a corrective contribution with respect to elective deferrals . . . for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals . . .under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred. . . ." (EPCRS, Appendix B, Section 2.02(1)(a)(ii)(F).)

Belgarath

Aug 31 2010, 02:27 PM

Sieve - I've never been quite sure if that "dispensation" in Appendix B for the "brief exclusion" applies to this situation. A strict reading might lead one to think it only applies to a situation where the participant was not properly given the opportunity to defer, rather than also applying to a situation where the participant DID make an election and the employer failed to properly implement that deferral election.

I have a tendency to waffle a bit on my leaning on this issue, but mosly waffle towards the strict interpretation. Has anyone out there ever actually discussed this with an IRS representative to get any indication?

Sieve

Aug 31 2010, 03:05 PM

Bel --

I have no insight as to IRS interpretation. But, Appendix B, Section 2.01(a)(a)(i) states the following:

"In section 2.02(1)(a)(ii) below, the correction methods for (I) the exclusion of an eligible employee from all contributions (including designated Roth contributions) under a 401(k) or (m) plan for a full year, as described in Appendix A sections .05(2) and .05(3), (II) the exclusion of an eligible employee who was permitted to make elective deferrals, but was not permitted to make catch-up contributions for a full plan year as described in Appendix A section .05(4), and (III) the exclusion of an eligible employee on account of the failure to implement an employee's election to make elective deferrals or after-tax employee contributions to the plan as described in Appendix A section .05(5) are expanded to include correction for the exclusion from these contributions (including designated Roth contributions) under a 401(k) or (m) plan for a partial plan year."

The 9-month special dispensation rule is, in fact, in 2.02(1)(a)(ii)--at (F). So, doesn't the rule apply to both situations (i.e., (i) exclusion due to no opportunity to elect (I, above)), and (ii) exclusion due to failure to implement an election (III, above))?

Belgarath

Sep 1 2010, 10:21 AM

I see, said the blind man, as he picked up his hammer and saw! Thanks for setting me straight.

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