A Deferral Opportunity Was Missed—Now What?

An elective deferral was not withheld from an eligible employee’s compensation. A recent blog entry provides a refresher on what happens in such a circumstance. 

Why might this have happened in the first place? Joni L. Jennings, Retirement Services Compliance Manager at Newfront brokerage, suggests that missed deferral opportunities (MDO) are not unusual and may arise due to a failure to:  

• enroll an eligible employee;
• apply automatic enrollment;
• implement a deferral election; or 
• apply a deferral election to the correct compensation.

Jennings stresses taking initiative to self-correct an MDO through the IRS’ Employee Plans Compliance Resolution System (ECPRS) system. She notes, however, that situations that are especially bad and or that have persisted over many plan years and have involved many plan participants may require submission to the IRS for formal approval. 

“The key is to follow the IRS’ correction methods,” says Jennings. She adds that a plan can only double deferrals if an employee chooses for that to be done.  

QNEC?

Certain rules kick in if a qualified non-elective contribution (QNEC) is used, Jennings notes. 

If the plan does not have an automatic enrollment feature, to be able to use the reduced QNEC (0% or 25%) when a participant notifies the employer of the MDO:

1. the employer must begin correct deferral withholding as soon as possible—and no later than the first pay period in the month following the end of the month in which the employee notified the employer; and  
2. the employer must notify that participant within 45 days from the date on which the correct withholding starts. 

If either of these conditions is not met, the QNEC will be 50% of the MDO.

Plans that do have an automatic enrollment have more time to correct an MDO. Jennings notes. 

Missed Earnings

Corrective contributions are only part of what must be done if a QNEC is required, Jennings adds: missed earnings also must be added to corrective contributions. She notes that those earnings are calculated from the date of the failure to the end of the plan year in which it occurred. The principal, together with the earnings, then are the new basis for the following year’s calculation of earnings (if applicable).

Notice to Participants 

And that’s not all, Jennings writes: if a reduced QNEC is used, a notice must be provided to each participant who is affected. Such notices must contain the percentage or dollar amount of plan compensation that should have been deferred, the plan name and contact information. 

These notices also must contain the date that the deferral election should have been implemented and the correct withholding began, as well as a statement that: 

• the employee can adjust their future withholding;
• any applicable matching contributions have been and/or will be made; and 
• if applicable, that the plan sponsor will be or has made corrective contributions.