The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in the state of Washington is representative of a question we commonly receive regarding correcting missed 401(k) plan employee salary deferrals. The advisor asked:
“I have a plan sponsor client who claims he does not have to make a corrective contribution for failing to allow an eligible 401(k) plan participant to defer into the plan. Could that be true?”
Highlights of Discussion
• That may be true, depending on the circumstances.
• If a plan sponsor fails to give eligible employees the opportunity to elect to make salary deferrals or employee after-tax contributions (if permitted under the plan), generally, the sponsor must correct the error by making a qualified nonelective contribution (QNEC) on behalf of the employee that would recompense him or her for the missed deferral and matching contribution (if applicable) opportunity (see Rev. Proc. 2013-12).
• There is an exception to this rule, however, if the employee was excluded from making elective deferrals or employee after-tax contributions for only a brief length of time.
• If the employee could make elective deferrals or after-tax employee contributions under the plan for at least the last nine months in the plan year and, during that period, the employee had the opportunity to make elective deferrals or employee after-tax contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred, then the plan sponsor is not required to make a QNEC for the failure to allow the employee to such contributions. However, if the plan provides for matching contributions, the plan sponsor would need to make a QNEC to make up for any matching contributions that relate to deferrals that could have been made during the first three months of the plan year (Rev. Proc. 2013-12, §2.02(1)(a)(ii)(F)).
Conclusion
As the saying goes, there is an exception to every rule. That adage holds true for the proper corrective action required when a plan fails to allow an otherwise eligible employee to make a salary deferral election in a 401(k) plan. Be sure to look at the number of months the employee was allowed to make a salary deferral election to determine the best corrective route to take.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
