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Missed Deferrals: A Closer Look

Practice Management

A recent ASPPA webcast included questions and answers on the nuts-and-bolts issues involved in missed deferrals and how to correct them.

While one may not encounter these specific situations, the Q&As serve as a reminder of the compliance-related reasons why it is important to not miss a deferral, and illustrate that such mistakes can create problems not only for participants but also plan administrators and sponsors — and that it’s important to meet deferral deadlines and fulfill deferral responsibilities fully and in a timely fashion.

Speaker Mike Smith, a Vice President at Voya Financial, created the Q&As as part of the “Correcting Missed Deferrals” webcast.

Question 1: What is the missed deferral for a participant who does not make an affirmative election (assume not auto-enroll, not SH)?
A. Highest level that draws 100% match
B. ADP% for the employee’s group (HCE or NHCE)
C. 3%

Answer 1: B. The missed deferral for a participant who does not make an affirmative election under a non-auto-enroll or safe harbor plan is deemed to be the ADP percentage for the employee’s group. Under a traditional safe harbor match plan, the answer would be A, the highest level that would draw a 100% match. 

Question 2: Under a plan that provides for automatic enrollment, what is the missed deferral opportunity QNEC percentage for a plan that meets the timing and 45-day notice requirement?
A. 0%
B. 25%
C. 50%

Answer 2: A (0%), provided the following requirements are met:

  • The failure to implement automatic deferral does not extend beyond 9½ months after the plan year of the failure.
  • Correct deferrals commence no later than the earlier of: (1) the first payment of compensation on or after 9½-month period, or (2) the first payment of compensation on or after the last day of the month after the month the participant notifies the employer of the missed deferral.
  • The correction applies even for employees making an affirmative election. 
  • Notice of the failure must be provided to impacted employees no later than 45 days after the date correct deferrals begin.
  • Remember: The same advantage applies for non-automatic enrollment plan under the 3-month rule.

Question 3: What is the required match percentage that must be made up on amounts attributable to a missed deferral?
A. 25%
B. 50%
C. 100%

Answer 3: C. The employer must make up 100% of the match that the employee would have received as if the failure had not occurred. Note that if the plan is a traditional safe harbor plan the corrective match contribution must be maintained in a QNEC source (like the corrective contribution for missed deferrals). For other plans, the corrective match may be maintained in a non-elective employer contribution source. 

Question 4: May an employer use a reasonable estimate to calculate missed earnings if actual earnings are not  available?
Yes
No

Answer 4: Yes. A reasonable estimate may be used if actual earnings are not available, subject to the following rules:

  • Precise calculation is not possible, or precise calculation is possible but: (1) the probable difference between precise and approximate is insignificant, and (2) the administrative cost for precise calculation would significantly exceed the difference.
  • The DOL calculator may be used in some circumstances if it is not feasible to make a reasonable estimate.


Question 5: What is the missed deferral for a missed catch-up contribution if the catch up eligible participant was not provided an opportunity to make a catch-up contribution?
A.   ADP % for the employee’s group
B.   One half of the catch-up limit for the year
C.   3%

Answer 5: B. The missed deferral is one half of the catch-up limit for the year (i.e., 50% of $6,000=$3,000 for 2019). Remember that $3,000 is only the deemed “missed deferral.” The “missed deferral opportunity” is 50% of the missed deferral, or $1,500. Note that the 0% and 25% thresholds under the early correction program is not available for catch-up. The auto-enrollment method is not available for catch-up.

Webcast Available

More information about the webcast “Correcting Missed Deferrals,” is available here.