Errors and acceptable correction methods Revised May 2017

Transcription

1 Revised May 2017 SCP and VCP Error Index Error Description 01 Failure to properly provide the minimum top-heavy benefit or contribution to non-key employees. 02 Failure to satisfy the ADP test, the ACP test, or, for plan years beginning on or before December 31, 2001, the multiple use test. [Option 1] 03 Failure to satisfy the ADP test, the ACP test, or, for plan years beginning on or before December 31, 2001, the multiple use test. [Option 2] 04 Failure to distribute elective deferrals in excess of the section 402(g) limit. 05 Employee elective deferral failure that does not exceed 3 months. 06 Employee elective deferral failure that extends beyond 3 months but not past the SCP Significant Failure Deadline. 07 Employee elective deferral failure to implement an automatic contribution feature (available until January 1, 2021) 08 Exclusion of an eligible employee from making elective deferrals or employee post-tax contributions, or from receiving matching contributions for one or more plan years. 09 Exclusion of an employee eligible to participate in a defined contribution plan from making elective deferrals or employee post-tax contributions, or from receiving matching contributions for less than one year. 10 Exclusion of an employee eligible to participate in a safe harbor 401(k) plan from making elective deferrals. 11 Failure to implement an employee election. 12 Exclusion of an eligible employee from a plan that permits designated Roth contributions. 13 Exclusion of an eligible employee to make catch-up contributions to a 401(k) plan. 14 Exclusion of an eligible employee from receiving a profit sharing contribution. [Option 1] 15 Exclusion of an eligible employee from receiving a profit sharing contribution. [Option 2] 16 Failure of a 403(b) plan to satisfy the universal availability rule. 17 Failure to timely pay the required minimum distribution (RMD) under section 401(a)(9). 18 Failure to obtain participant and/or spousal consent for a distribution subject to the participant and spousal consent rules. 19 Failure to satisfy the defined contribution annual additions limits for limitation years beginning before January 1, Failure to satisfy the defined contribution annual additions limits for limitation years beginning on or after January 1, Failure to satisfy the defined contribution annual additions limit with respect to an NHCE. 1

2 VCP only Error Index 22 Error Description Failure to satisfy the defined contribution annual additions limit, where the portion of the excess attributable to matching and nonelective contributions has already been distributed. 23 Overpayments because of amounts paid in excess of the defined benefit annual benefit limit. 24 Vesting error in a defined contribution plan that results in forfeiture too large a portion of the employee s account balance. All overpayment errors, including distributions exceeding the employee s or beneficiary s benefit under the plan due to an error in applying the 25 compensation limit ($200,000 as indexed), an error in forfeiting nonvested ACP excesses, or an error in forfeiting matching contributions attributable to Excess Amounts Allocation of contributions or forfeitures under a defined contribution plan based on compensation in excess of the compensation limit ($200,000 as indexed). [Option 1] Allocation of contributions or forfeitures under a defined contribution plan based on compensation in excess of the compensation limit ($200,000 as indexed). [Option 2] Hardship distributions made under a plan that does not allow hardship distributions or plan loans made under a plan that does not allow plan loans. Inclusion of employee who has not met the plan s minimum age or service requirement or who was included too soon due to an incorrect plan entry date. 30 Employer eligibility error. 31 Loan amount exceeding the maximum permissible amount ($50,000/50% limit). 32 Loan repayment period exceeds the maximum permissible repayment period (5 years for a general purpose loan). 33 Loans that do not meet the level amortization requirements. 34 Loan default errors. 2

3 Rev. IRS Revenue Procedure , which replaces and supersedes Revenue Procedure , lists a number of errors that can be corrected under the various programs and some specific correction methods that are deemed acceptable to correct these errors. The list is only a sample of the errors that can be corrected under EPCRS. Many other types of errors commonly occur and can be corrected using EPCRS, but the IRS has not published specific correction methods. The list of correction methods below was created to give employers sponsoring qualified pension, profit sharing, stock bonus, and 403(b) plans guidance about acceptable correction methods for some of the most common errors and may be expanded as the IRS sees fit. The errors listed can also be corrected using a method other than that described below. However, any other correction method must meet the General Correction Principles under EPCRS, and any employer interested in using an EPCRS program must meet that program s eligibility requirements (see IRS Employee Plans Compliance Resolution System (EPCRS) Options). The following correction methods are available under both SCP and VCP. 1. Failure to properly provide the minimum top-heavy benefit or contribution to nonkey employees. 2. Failure to satisfy the ADP test, the ACP test, or, for plan years beginning on or before December 31, 2001, the multiple use test. [Option 1] Defined contribution plan: The plan sponsor must properly contribute and allocate the required top-heavy minimums to the plan in the manner provided for in the plan on behalf of the non-key employees (and any other employees required to receive top-heavy allocations under the plan). The corrective allocation must include lost earnings. Defined benefit plan: The non-key employees must accrue the minimum required benefit in the manner provided in the plan. QNEC method: The plan sponsor must make qualified nonelective contributions (QNECs) to nonhighly compensated employees (NHCEs) to the extent necessary to raise the ADP or ACP of the NHCEs to the percentage needed to pass the test or tests. These contributions must: Be made on behalf of all eligible NHCEs (to the extent that the Code section 415 limits on annual additions are not exceeded); and Be the same percentage of compensation; and Include lost earnings. Plan forfeitures may not be used to fund the QNECs. Employer A maintains only a profit sharing plan that provides for elective deferrals and nonelective contributions. Employer A did not make a profit sharing contribution for In 2007, Employer A discovers that the plan was top-heavy for 2005, and the Employer did not make the minimum required contribution. In 2007, Employer A contributes the top-heavy minimum to the plan: 3% of compensation, adjusted for lost earnings, to each non-key individual employed on the last day of the 2005 plan year. Employer L maintains a 401(k) plan that uses the current year ADP testing method. The plan does not provide for matching or after-tax contributions. In 2007, it was discovered that testing for 2005 was performed incorrectly. When rerun, the 2005 ADP test was not satisfied. The 2005 HCE ADP was 9%. The 2005 NHCE ADP was 4%. The plan would not have passed the ADP test if the prior year method was used. Employer L must make a QNEC to eligible NHCEs to raise the NHCE ADP to 7%. 3

4 The plan sponsor does not have to match the QNECs made to satisfy the ADP test. However, employees who would have been eligible for a matching contribution if they had made elective deferral contributions must be counted as eligible employees for the ACP test, and the plan must satisfy the ACP test. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees to reduce the number of employees eligible to receive QNECs. Likewise, under this correction method, the plan may not be restructured into component plans (as permitted for plan years before January 1, 1992) to reduce the number of employees eligible to receive QNECs. Employer L calculates the QNEC to be 3% of compensation for all eligible employees, giving the same percentage of compensation to each. The amount allocated to each account includes lost earnings. 3. Failure to satisfy the ADP test, the ACP test, or, for plan years beginning on or before December 31, 2001, the multiple use test. [Option 2] One-to-One method: The plan sponsor a) Distributes the excess amounts to the highly compensated employees (HCEs), and b) Allocates an equal amount as a QNEC to the nonhighly compensated employees (NHCEs). The excess amount to be returned to an HCE is the sum of any excesses determined from the ADP, ACP and multiple use tests, adjusted for earnings through the date of the correction. Any amounts that were not vested as of the close of the plan year of the error are forfeited. Amounts forfeited are used according to the plan s forfeiture provisions in place for the year of the error. If an excess amount has already been distributed to an HCE, the employer must notify the employee that the distribution was not eligible for favorable tax treatment, Employer S maintains a 401(k) plan that uses the current year ADP testing method. The plan provides for matching and after-tax contributions. Matching contributions equal 50% of the sum of elective deferrals and after-tax contributions that do not exceed 10% of the employee s compensation. Matching contributions are subject to a 5-year graded vesting schedule. Matching contributions are forfeited and used to reduce employer contributions if associated elective deferrals or after-tax contributions are distributed to correct an ADP, or ACP test failure. For 2005, only NHCEs made after-tax contributions. Two HCEs were eligible in 2005, Employee P and Employee Q. Employee P made elective deferrals of $10,000, which was 10% of his compensation for 2005 ($100,000). Employee Q made elective deferrals of $9,500, which was 8% of his 2005 compensation ($118,750). Employee P received a matching contribution of $5,000 (50% of 4

5 such as a tax-free rollover. If an excess matching amount that should have been forfeited has been paid to an HCE, this amount is an Overpayment that must be corrected (see Failure to satisfy the defined contribution annual additions limit, where the portion of the excess attributable to matching and nonelective contributions has already been distributed). The total QNEC amount to be allocated to NHCEs is the sum of all excess contributions adjusted for earnings through the date of the correction, excluding forfeited related matching contributions. Plan forfeitures may not be used to fund the QNEC. The plan sponsor must pick the group of employees who will receive the contribution from the following choices*: Individuals who were eligible to participate and were NHCEs in the year of the error. Individuals who were eligible to participate and were NHCEs both in the year of the error and the year of correction. Individuals who were eligible to participate and were NHCEs in the year of the error, but who are still employees as of a date in the year of correction that is no later than the date of correction. Individuals who were eligible to participate and were NHCEs both in the year of the error and the year of correction, but who are still employees as of a date in the year of correction that is no later than the date of correction. *The four options listed above assume the plan sponsor uses the current year testing method. If the prior year testing method is used, substitute the year prior to the year of the error for the year of the error in the dot $10,000). Employee Q received a matching contribution of $4,750 (50% of $9,500). Employees P and Q were 100% vested in In 2007, it was discovered that testing for 2005 was performed incorrectly. When rerun, the 2005 ADP test was not satisfied. The 2005 HCE ADP was 9%. The 2005 NHCE ADP was 4%. The plan would not have passed the ADP test if the prior year method was used. The ACP test would have been satisfied for 2005 without any corrective action. Employer S calculates the dollar amount of the excess contributions for the two HCEs. The excess contribution for Employee P is $3, The earnings on Employee P s excess are $687. Employee P receives a distribution of $4, ($3, plus $687). The excess contribution for Employee Q is $2, The earnings of Employee Q s excess are $587. Employee Q receives a distribution of $3, ($2, plus $587). The total of the excesses, adjusted for earnings, is $7,649. Employer S makes a corrective contribution to the plan in the amount of $7,649. The corrective contribution is allocated to eligible NHCEs for 2005, pro rata based on 2005 compensation. Employee P s and Employee Q s matching contributions related to the distributed excesses, adjusted for earnings, are forfeited. The forfeited amounts are used to reduce contributions for 2007 and subsequent years. 5

6 points above. Regardless which group the employer selects to receive the contribution, it is allocated to each employee as a uniform allocation (as a percentage of compensation). The allocation is not adjusted further for earnings. It is treated as an annual addition for the year of the error. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees to reduce the number of employees eligible to receive QNECs. 4. Failure to distribute elective deferrals in excess of the section 402(g) limit. Likewise, restructuring the plan into component plans is not permitted to reduce the number of employees eligible to receive QNECs. The plan must distribute the excess deferral, and allocable earnings, to the employee and report the amount as taxable in the year of deferral and the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is a designated Roth contribution. A distribution to a highly compensated employee is included in the ADP test. A distribution to a nonhighly compensated employee is not included in the ADP test. Employer P maintains a 401(k) plan. Employee W (an HCE) and Employee U (a NHCE) each exceeded the section 402(g) deferral limit of $15,500 in The error is discovered in May of The 2007 Form W-2 for Employee W and Employee U will reflect deferrals greater than $15,500. The employees will be allowed to defer taxation on only $15,500 when they file their tax return. The employees will need to report the excess as taxable income in The amounts deferred above $15,500, adjusted for earnings, are removed from the accounts and distributed to Employee W and Employee U in Employee W and Employee U will receive a 2008 Form 1099R showing the excess amounts removed, and allocable earnings, as taxable in The excess amount distributed to Employee W is included in the 2007 ADP test. The excess amount distributed to Employee U is not included in the 2007 ADP test. 6

7 5. Employee elective deferral failure that does not exceed 3 months. No employer contribution is required to correct missed elective deferrals if all of the following conditions are satisfied: The correct deferrals begin by the earlier of: o The first payroll period occurring 3 months following the initial date of the error, or o The first payroll period occurring on or after the last day of the month following the month in which the participant notified the plan sponsor of the failure. The employer makes corrective contributions to make up for missed matching contributions, adjusted for earnings; and Affected employees are notified within 45 days following the date the correct deferrals begin. Participant notices must contain all of the following information: 1. General information relating to the failure, such as the deferral percentage that should have applied and the approximate date that the deferrals should have begun; 2. A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or will begin shortly); 3. A statement that corrective contributions for missed matching contributions have been made (or will be made); 4. An explanation that the participant may increase his deferral percentage to make up for the missed deferral opportunity, subject to applicable limit under section 402(g); and 5. The plan name and plan contact information (including name, street address, address, and telephone number of a plan contact). 6. Employee elective deferral failure that extends beyond 3 The plan sponsor must make a QNEC to the plan for the employee that is equal to the missed deferral opportunity. The missed deferral opportunity is equal to 7

8 months but not past the SCP Significant Failure Deadline. 25% of the missed deferral. Under a non-safe harbor 401(k) plan, the missed deferral is equal to the ADP for the employee s group (either HCE or NHCE) multiplied by compensation for the time period the exclusion occurred. Compensation can be prorated for this purpose. In a safe harbor 401(k) plan, the employee s missed deferral is determined by multiplying 3% (or, if greater, whatever percentage of the participant s compensation which, if contributed as an elective deferrals, would have been matched at a rate of 100% or more) by the employee s plan compensation for the time period the exclusion occurred. In addition, all of the following conditions must be satisfied: The correct deferrals begin by the earlier of: o The first payroll period occurring after the last day of the second plan year following the plan year in which the error occurred, or o The first payroll period occurring on or after the last day of the month following the month in which the participant notified the plan sponsor of the failure. The employer also makes corrective contributions to make up for missed matching contributions, adjusted for earnings; and Affected employees are notified within 45 days following the date the correct deferrals begin. Participant notices must contain all of the following information: 1. General information relating to the failure, such as the deferral percentage that should have applied and the approximate date that the deferrals should have begun; 2. A statement that appropriate amounts have begun 8

9 to be deducted from compensation and contributed to the plan (or will begin shortly); 3. A statement that corrective contributions have been made (or will be made); 4. An explanation that the participant may increase his deferral percentage to make up for the missed deferral opportunity, subject to applicable limit under section 402(g); and 5. The plan name and plan contact information (including name, street address, address, and telephone number of a plan contact). 7. Employee elective deferral failure to implement an automatic contribution feature (available for failures beginning on or before December 31, 2020) This correction method applies to both situations where the default contribution percentage was not applied and situations where an alternative percentage affirmatively elected by a participant in an automatic contribution plan was not applied. No employer contribution is required to correct missed elective deferrals if all of the following conditions are satisfied: The correct deferrals begin by the earlier of: o The first payroll period occurring after 9½ months following the end of the plan year in which the failure occurred, or o The first payroll period occurring on or after the last day of the month following the month in which the participant notified the plan sponsor of the failure; The employer makes corrective contributions to make up for missed matching contributions, adjusted for earnings; and Affected employees are notified within 45 days following the date the correct deferrals begin. Participant notices must contain all of the following information: 1. General information relating to the failure, such as the deferral percentage that should have applied 9

10 and the approximate date that the deferrals should have begun; 2. A statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or will begin shortly); 3. A statement that corrective contributions for missed matching contributions have been made (or will be made); 4. An explanation that the participant may increase his deferral percentage to make up for the missed deferral opportunity, subject to applicable limit under section 402(g); and 5. The plan name and plan contact information (including name, street address, address, and telephone number of a plan contact). 8. Exclusion of an eligible employee from making employee posttax contributions (to a defined contribution or defined benefit plan) or elective deferrals, or from receiving matching contributions for one or more plan years. Defined contribution plan: The plan sponsor must make a contribution to the plan on behalf of the excluded employees. The corrective contributions must include lost earnings. If the employee was eligible to make an elective deferral contribution under a non-safe harbor 401(k) plan, the plan sponsor must make a QNEC to the plan for the employee that is equal to the missed deferral opportunity. The missed deferral opportunity is equal to 50% of the missed deferral. The missed deferral is equal to the ADP for the employee s group (either HCE or NHCE). The employee s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit. If the employee would have received an allocation of employer matching contributions under a non-safe harbor 401(k) plan, but did not receive the matching contributions because the employee was not given the opportunity to make elective deferrals, the employer must make a Employer B maintains a 401(k) plan. Employees may enter the plan on the January 1 or July 1 following the completion of one year of service. Employee V (a NHCE), who met the eligibility requirements and should have entered the plan on January 1, 2006 was not offered the opportunity to participate for the 2006 plan year. Employee V s compensation for the 2006 plan year was $30,000. For 2006, the ADP for NHCEs was 8% and the ACP for NHCEs was 2.63%.The ACP attributable to matching contributions for NHCEs was 2%. The ACP attributable to post-tax contributions was.63% The error was discovered in Employer B makes a QNEC for the excluded employee. Elective Deferrals: Employee V receives a QNEC equal to the missed deferral opportunity for Employee V - 50% of Employee V s missed deferral. The missed deferral for Employee V is $2,400 (8% x $30,000). The missed deferral opportunity is $1,200 (50% x $2,400). Thus, Employee V will receive $1,200 (plus earnings). Matching contributions: Employee V should have been eligible for, but did not receive a matching contribution because Employee V was not provided the opportunity to make elective deferrals in

11 corrected employer matching contribution on behalf of the affected employee. The corrective employer matching contribution will be equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined above, adjusted for earnings. If the employee was eligible to make employee post-tax contributions (other than designated Roth contributions), the employer must make a QNEC to the plan for the employee that is equal to 40% of the employee s missed post-tax contributions. The employee s missed post-tax contributions are equal to the ACP for the employee s group (either HCE or NHCE). If the employee would have received an allocation of employer matching contributions under a traditional 401(k) plan, but did not receive the matching contributions because the employee was not given the opportunity to make post-tax contributions, the employer must make a corrective employer matching contribution on behalf of the affected employee. The corrective employer matching contribution will be equal to the matching contribution the employee would have received had the employee made post-tax contributions equal to the missed post-tax contributions determined above, adjusted for earnings. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees to reduce the number of employees eligible to receive QNECs. Likewise, restructuring the plan into component plans is not permitted to reduce the number of employees eligible to receive QNECs. These correction methods do not apply until other Thus, Employer B must make a corrective employer matching contribution to the plan on behalf of Employee V that is equal to the matching contribution Employee V would have received had the missed deferral been made. Under the terms of the plan, if Employee V had made an elective deferral of $2,400 (8% x $30,000), the employee would have been entitled to a matching contribution of 100% of the first 3% of Employee V s compensation ($30,000) or $900, plus earnings. Post-tax contributions: Employee V was eligible to, but not provided with, the opportunity to make post-tax contributions from January 1 through August 31 of Employer B must make a QNEC for Employee V equal to the missed opportunity for making post-tax contributions for Employee V 40% of Employee V s missed posttax contributions, adjusted for earnings. The missed post-tax contribution is $189 (.63% x $30,000). The missed opportunity to make post-tax contributions is $76 (40% x $189), adjusted for earnings. The total required corrective contribution, before adjustment for earnings, for Employee V is $2,176 ($1,200+$900+$76). The corrective contribution for the missed deferral opportunity ($1200), the missed opportunity for post-tax contributions ($76), and earnings, must be made in the form of a QNEC. 11

12 qualification failures are corrected. For example, if in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described above cannot be used until after the correction of the ADP or ACP test failures. 9. Exclusion of an eligible employee from making employee posttax contributions (to a defined contribution or defined benefit plan) or elective deferrals, or from receiving matching contributions for less than one year. Defined benefit plan: The excluded employees must accrue their lost benefits. Exclusion for more than 3 months but less than one year The plan sponsor must make a contribution to the plan on behalf of the excluded employees. The corrective contributions must include lost earnings. If the employee was eligible to make an elective deferral contribution under a non-safe harbor 401(k) plan, the plan sponsor must make a QNEC to the plan for the employee that is equal to the missed deferral opportunity. The missed deferral opportunity is equal to 50% of the missed deferral. The missed deferral is equal to the ADP for the employee s group (either HCE or NHCE) multiplied by compensation for the time period the exclusion occurred. Compensation can be prorated for this purpose. The employee s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit. If the employee would have received an allocation of employer matching contributions under a traditional 401(k) plan, but did not receive the matching contributions because the employee was not given the opportunity to make elective deferral contributions, the employer must make a corrective employer matching contribution on behalf of the affected employee. The corrective employer matching contribution will be equal to the matching contribution the employee would have received had the Example for exclusion for more than 3 months but less than one year: Employer C maintains a non-safe harbor 401(k) plan. Employees may enter the plan on the January 1 or July 1 after completing one year of service. The plan provides for matching contributions equal to 100% of an employee s elective deferrals up to 2% of compensation during the payroll period. The plan provides for post-tax contributions, which may not exceed $1,000 for the plan year. Employee X (a NHCE), who met the eligibility requirements and should have entered the plan on January 1, 2006 was not offered the opportunity to participate. Employee X s plan compensation for 2006 was $36,000. The error was discovered in August 2006 and the employee was allowed to participate as of September 1, Employee X made elective deferrals of 4% of compensation for each payroll period from September 1, 2006 to December 31, The employee s plan compensation for 2006 was $36,000 ($26,000 for the first eight months and $10,000 for the last four months). Employer C made $200 in matching contributions to the excluded employee, which is 2% of the employee s plan compensation for each payroll period from September 1, 2006 to December 31, 2006 ($10,000). The 2006 NHCE ADP was 3%. The 2006 NHCE ACP was 1.8%. Employer C makes a corrective contribution for the excluded employee to make up the missed elective deferrals, matching contributions, and post-tax contributions. Elective Deferrals: To calculate the QNEC for the missed elective 12

13 employee made elective deferral contributions equal to the missed deferral determined above, adjusted for earnings. If the employee was eligible to make employee post-tax contributions (other than designated Roth contributions), the employer must make a QNEC to the plan for the employee that is equal to 40% of the employee s missed post-tax contributions. The employee s missed post-tax contributions are equal to the ACP for the employee s group (either HCE or NHCE) multiplied by compensation for the time period the exclusion occurred. Compensation can be prorated for this purpose. If the employee would have received an allocation of employer matching contributions under a traditional 401(k) plan, but did not receive the matching contributions because the employee was not given the opportunity to make post-tax contributions, the employer must make a corrective employer matching contribution on behalf of the affected employee. The corrective employer matching contribution will be equal to the matching contribution the employee would have received had the employee made the post tax contributions equal to the missed post-tax contributions determined above, adjusted for earnings. The maximum corrective employer matching contribution that can be made to correct missed matching contributions and employee post-tax contributions is equal to the sum of the matching contributions that would have been made for the employee if the employee had contributed the maximum matchable contributions permitted and the maximum post-tax contributions permitted under the plan for the plan year, minus matching and/or post-tax contributions already made for/by the participant that plan year. Under this correction method, a plan may not be treated deferrals, the employer pro-rates the employee s plan compensation for the eight-month period that the employee was improperly excluded (8/12ths of $36,000, or $24,000). The missed deferral for Employee V is $720 (3% NHCE ADP times $24,000), adjusted for earnings. The missed deferral opportunity is $360 (50% x $720). Thus, Employee X will receive a QNEC equal to $360 (plus earnings) for the missed elective deferrals. Matching contribution: Under the terms of the plan, if Employee X had made an elective deferral of $720 or 3% of compensation for the period of exclusion ($24,000), the employee would have been entitled to a matching contribution equal to 2% of $24,000 or $480. Employee X will receive a corrective employer matching contribution equal to $480 (plus earnings) for the matching contributions. Post-tax contributions: Employee X was eligible to, but not provided with, the opportunity to make post-tax contributions from January 1 through August 31, of Employer C must make a QNEC for Employee X equal to the missed opportunity to make post-tax contributions (40% of Employee X s missed post-tax contributions), adjusted for earnings. The missed post-tax contribution amount is $120 (8/12ths of the employee s 2006 plan compensation of $36,000 ($24,000) x 0.5% ACP. The required corrective contribution is $48 (40% x $120), adjusted for earnings. The total required corrective contribution for Employee X is $888 ($360 + $480 + $48), adjusted for earnings. The corrective contribution for the missed deferral opportunity ($360), the missed opportunity for the post-tax contributions ($48), and earnings must be made in the form of a QNEC. Example for exclusion for 3 months or less in a plan year: Employer E s 401(k) plan allows employees to enter the plan on the January 1 or July 1 after completing one year of service. The plan provides for matching contributions of 100% of elective deferrals, up to 2% of compensation per payroll period. An NHCE should have entered the plan on January 1, 2006, but was not offered plan participation. The error was discovered in March 2006 and the employee was allowed to participate as of April 1, The amount the employee was allowed to defer was not less than the 13

14 as two separate plans, one covering otherwise excludable employees and the other covering all other employees to reduce the number of employees eligible to receive QNECs. Likewise, restructuring the plan into component plans is not permitted to reduce the number of employees eligible to receive QNECs. These correction methods do not apply until other qualification failures are corrected. For example, if in addition to the failure of excluding an eligible employee, the plan also failed the ADP or ACP test, the correction methods described above cannot be used until after the correction of the ADP or ACP test failures. Exclusion for 3 months or less in a plan year If the employee is allowed to make deferrals for at least the last 9 months of the plan year in an amount at least equal to the maximum permitted if no error occurred, then the employer is not required to make a corrective contribution with respect to elective deferrals or employee post-tax contributions. However, the employer is still required to make a corrective contribution to correct missed matching contributions. The corrective contributions must include lost earnings. The employer must make a corrective contribution to the plan for the employee that is equal to the ACP for the employee s group (either highly compensated or nonhighly compensated) multiplied by compensation for the time period the exclusion occurred. Compensation can be prorated for this purpose. The maximum corrective contribution that can be made to correct missed matching contributions and employee posttax contributions is equal to the sum of the matching maximum deferrals the employee could have made if given the opportunity to defer on January 1, The employee made elective deferrals of 4% of compensation for each payroll period from April 1, 2006 to December 31, The employee s plan compensation for 2006 was $40,000 ($8,000 for the first three months and $32,000 for the last nine months). Employer E made $640 in matching contributions to the excluded employee, which is 2% of the employee s plan compensation for each payroll period from April 1, 2006 to December 31, 2006 ($32,000). The 2006 NHCE ADP was 3%. The 2006 NHCE ACP was 1.8%. Since the employee was given the opportunity to defer for at least the last 9 months of the plan year, Employer E is not required to make a corrective contribution to make up missed deferrals. Employer E does need to make a corrective contribution to make up missed matching contributions. The corrective contribution must include lost earnings. To calculate the corrective contribution, the employer pro-rates the employee s plan compensation for the three-month period that the employee was improperly excluded (3/12ths of $40,000, or $10,000). The amount of the corrective employer matching contribution calculated to make up missed matching contributions is $200 (2% times $10,000), adjusted for earnings. However, when $200 is added to the matching contribution already received ($640), the total ($840) exceeds the $750 plan limit on matching contributions by $90. Therefore, the missed matching contribution is reduced to $110 ($200 minus $90). The required corrective employer matching contribution is $110, adjusted for earnings. 14

15 contributions that would have been made for the employee if the employee had contributed the maximum matchable contributions permitted and the maximum posttax contributions permitted under the plan for the plan year, minus matching and/or post-tax contributions already made for/by the participant that plan year. 10. Exclusion of an employee eligible to participate in a safe harbor 401(k) plan from making elective deferrals (other than designated Roth contributions). In a safe harbor 401(k) plan, the employee s missed deferral is determined by multiplying 3% (or, if greater, whatever percentage of the participant s compensation which, if contributed as an elective deferrals, would have been matched at a rate of 100% or more) by the employee s plan compensation for the portion of the year during which the employee was improperly excluded. For a traditional safe harbor plan, the employer must make a QNEC to the plan for the employee that is equal to the amount of the missed deferral opportunity (50% of the missed deferral) plus the applicable safe harbor matching or nonelective contribution. For a qualified automatic contribution arrangement (QACA) plan, the employer must make a corrective employer contribution for the applicable safe harbor matching or contribution, instead of a QNEC. The employee s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit. Example for traditional safe harbor 401(k) plan using safe harbor match of 100% up to 3% of compensation, plus 50% from 3% to 5% of compensation. Employer G maintains a traditional safe harbor 401(k) plan that uses a rate of matching contributions to satisfy the safe harbor requirements. Employee M, an NHCE, should have entered the plan on January 1, 2006, was not offered the opportunity to participate for the 2006 plan year. The employee s compensation for 2006 was $20,000. Employer G makes a QNEC for the excluded employee. Elective Deferrals: The employee s missed deferral is 3% of compensation, or $600 (3% x $20,000). The required QNEC for the employee s missed deferral opportunity in 2006 is $300 (50% x $600.) Matching Contribution: The required QNEC for the missed matching contribution is $600. The total required QNEC for the employee is $900 ($300 + $600), plus earnings. Example for traditional safe harbor 401(k) plan using safe harbor match of 100% of elective deferrals up to 4% of compensation. Same facts as above, except the plan provides for matching contributions equal to 100% of elective deferrals that do not exceed 4% of an employee s compensation. Employer G makes a QNEC for the excluded employee. Elective Deferrals: The employee s missed deferral is 4% of compensation, or $800 (4% x $20,000). The required QNEC for the employee s missed deferral opportunity in 2006 is $400 (50% x 15

16 $800). Matching Contribution: The required QNEC for the missed matching contribution is $800. The total required QNEC for the employee is $1,200 ($400 + $800), plus earnings. Example for traditional safe harbor 401(k) Plan using nonelective contribution of 3% of compensation. Same facts as above, except the plan uses a nonelective contribution equal to 3% of compensation to satisfy the safe harbor requirements. Employer G makes a QNEC for the excluded employee. Elective Deferrals: The employee s missed deferral is 3% of compensation, or $600 ($20,000 x 3%). The required QNEC for the employee s missed deferral opportunity in 2006 is $300 (50% x $600). Matching Contribution: The required QNEC for the missed matching contribution is $600. The total required QNEC for the employee is $900 ($300 + $600), plus earnings. 11. Failure to implement an employee contribution election for employee deferrals or post-tax contributions For employees who made an election to make elective deferral contributions to the plan, which the employer failed to implement on a timely basis, the employer must make a QNEC to the plan for the employee that is equal to the missed deferral opportunity. The missed deferral opportunity is equal to 50% of the missed deferral. The missed deferral is equal to the employee s elected deferral percentage multiplied by the employee s compensation. If the employee elected a dollar amount for an elective deferral, the missed deferral would be the specified dollar amount. The employee s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit. For employees who made an election to make post-tax Employer K maintains a 401(k) plan. The plan provides for matching contributions equal to 100% of elective deferrals that do not exceed 3% of an employee s compensation. On January 1, 2006, Employee T made an election to contribute 10% of compensation for the 2006 plan year. However, Employee T s election was not processed and the required amounts were not withheld from Employee T s salary in For 2006, Employee T s salary was $30,000. Elective Deferrals: For the missed elective deferral, Employer K must make a QNEC to the plan on behalf of Employee T equal to 50% of Employee T s missed deferral. The missed deferral is equal to $3,000 (10% x $30,000). Employer K makes a QNEC to the plan equal to $1,500 (50% x $3,000), adjusted for earnings. Match: Employer K must make a corrective employer matching contribution to the plan on behalf of Employee T equal to the matching contribution Employee T would have received had the 16

17 employee contributions under the plan, which the employer failed to implement on a timely basis, the employer must make a QNEC to the plan for the employee that is equal to 40% of the employee s elected post-tax contribution percentage multiplied by the employee s compensation. If the employee would have been entitled to a matching contribution on the missed deferral or post-tax contribution, the employer must make a corrective contribution equal to the matching contribution the employee would have received if the employee had made a deferral equal to the missed deferral (not reduced by 50%) or the missed post-contribution (not reduced by 60%). If the plan is a traditional safe harbor plan, the corrective contribution must be made in the form of a QNEC. All corrective contributions must be adjusted for earnings. missed deferral been made. The corrective employer matching contribution is adjusted for earnings. Under the terms of the plan, if Employee T had made an elective deferral of $3,000, he would have been entitled to a matching contribution of 100% of the first 3% of compensation or $900 ($30,000 x 3%), plus earnings. The total required corrective contribution for Employee T is $2,400 ($1,500 for the missed deferral opportunity plus $900 for the missed matching contribution), plus earnings. The corrective contribution for the missed deferral opportunity ($1,500) and related earnings must be in the form of a QNEC. 12. Exclusion of an eligible employee from a 401(k) plan that permits designated Roth contributions Use the correction method for the exclusion of an employee from making pre-tax elective deferral contributions. The QNEC required to replace the missed deferral is made according to the method discussed for a traditional 401(k) plan or a safe harbor 401(k) plan, as applicable. 13. Exclusion of an eligible employee to make catch-up contributions to a 401(k) plan. However, the QNECs are not treated as designated Roth contributions and are not contributed to a designated Roth account. Instead, the contributions must be allocated as a QNEC or other employer contribution that is 100% vested and subject to withdrawal restrictions that apply to elective deferrals. The employer makes a QNEC equal to 50% of the employee s missed deferral attributable to catch-up contributions. The missed deferral is half of the catch-up limit for the year the employee was excluded. Employer H maintains a 401(k) plan. The plan limits deferrals to the lesser of the deferral limit or the annual additions limit. The plan also permits catch-up contributions. The plan provides for a 60% matching contribution on elective deferrals. For 2006, the deferral limit is $15,000, and the catch-up 17

18 If the employee was entitled to a matching contribution, the employer must make a corrective employer matching contribution equal to the additional matching contribution the employee would have received under the terms of the plan if the employee made a deferral equal to the missed deferral (50% of the catch-up limit for the year). contribution limit is $5,000. Employee R, age 55 is a nonhighly compensated employee who earned $60,000 in 2006 and made elective deferrals totaling $15,000 in For 2006, Employee R was not provided the option to make catch-up contributions. The missed deferral for Employee X is $2,500 (50% of $5,000) and the resulting QNEC is $1,250 (50% of $2,500). In addition, Employee R was entitled to a matching contribution equal to 60% of the missed deferral attributable to the catch-up contribution that the employee would have made if the failure had not occurred. The missed deferral is $2,500 and the corresponding matching contribution is $1,500 (60% of $2,500). Employer H makes a QNEC to the plan on behalf of Employee R equal to $1,250 for the missed deferral, adjusted for earnings. In addition, Employee R makes a required corrective contribution for the additional matching contribution equal to $1,500, adjusted for earnings. 14. Exclusion of an eligible employee from receiving a profit sharing contribution. [Option 1] 15. Exclusion of an eligible employee from receiving a profit The employer must make a corrective contribution for the amount the participant would have received under the plan s allocation formula for that year. The corrective contribution must include lost earnings. If the exclusion of one employee caused another employee to receive more than he would have if the original contribution were properly allocated, the second employee s account does not have to be reduced. The employer must make a corrective contribution for the amount the participant would have received under the plan s allocation formula for that year. The corrective Employer D maintains a profit sharing plan that provides for a nonelective contribution which is allocated in the ratio that each eligible employee s compensation bears to the compensation of all eligible employees for the plan year. Employer D made a contribution for the 2006 plan year. Five eligible employees were excluded from the allocation. Employees who did receive the contribution received 10% of compensation. Most of the employees who received the contribution were NHCEs. If the five excluded employees had been included, all eligible employees would have received an allocation of 9% of compensation. Employer D makes a corrective contribution to the five excluded employees equal to 10% of each employee s compensation, adjusted for earnings. Employer D maintains a profit sharing plan that provides for a nonelective contribution, which is allocated in the ratio that each eligible employee s compensation bears to the compensation of all 18

19 sharing contribution [Option 2] 16. Failure of a 403(b) plan to satisfy the universal availability rule. contribution must include lost earnings. In addition, the account balance of each employee who received more in the original allocation than he would have if the error had not occurred is reduced by that excess amount, adjusted for earnings. With respect to the adjustment for earnings, the following guidelines apply: If most of the employees whose accounts are being reduced are NHCEs and there was an overall investment gain for the period from the date of the original contribution to the correction, the accounts do not have to be adjusted for earnings. If most of the employees whose accounts are being reduced are NHCEs and the accounts are adjusted for earnings, the employer can use the lowest earnings rate for any fund from the period from the original contribution to the correction. If an employee took a distribution before the date of the correction, that employee may keep that distribution if most of the employees who took distributions are NHCEs. If the total amount of contributions to be made for excluded employees is less than the total amount of decreases in accounts, the amount by which employees accounts are reduced is decreased on a pro-rata basis until the reductions equal the contribution amount and the employer does not have to make additional contributions. If the employee was not provided the opportunity to elect and make elective deferrals to a 403(b) plan, in lieu of determining the missed deferral based on the ADP as described above, the missed deferral is equal to the greater of 3% of compensation of the maximum deferral percentage for which the plan sponsor provides a matching contribution rate that is at least as favorable as 100% of the elective deferral made by the employee. 19 eligible employees for the plan year. Employer D made a contribution for the 2006 plan year. Five eligible employees were excluded from the allocation. Employees who did receive the contribution received 10% of compensation. Most of the employees who received the contribution were NHCEs. If the five excluded employees had been included, all eligible employees would have received an allocation of 9% of compensation. The account balance of each excluded employee is increased by 9% of the employee s 2006 compensation, adjusted for earnings. The account balance of each of the eligible employees other than the excluded employees is decreased by 1% of the employee s 2006 compensation, adjusted for earnings. Employer D determines the earnings adjustment using the earnings rate of each eligible employee s excess allocation, using reasonable, consistent assumptions. The total of the reductions in account balances exceeds the total of required increases. The initially determined reductions are decreased pro rata so that the total of the actual reductions in account balances equals the total of the increases in account balances, and Employer D does not make a corrective contribution. Employer H maintains a 403(b) plan. The plan provides for matching contributions equal to 100% of elective deferrals that do not exceed 3% of an employee s compensation. On January 1, 2012, Employee D was eligible to contribute to the plan, but was not given the opportunity to participate. For 2012, Employee D s salary was $30,000. Elective Deferrals: For the missed elective deferral, Employer H must make a QNEC to the plan on behalf of Employee D equal to 50% of Employee D s missed deferral. The missed deferral is equal