automatic enrollment improperly excluded from making elective deferrals

You Improperly Excluded an Employee from Your 401(k) Plan- Now What? Part 2: The Automatic Enrollment Plan

Let’s revisit our previous blog post and our example of Karl to show another wrinkle that you should be aware of when correcting a deferral failure. An employer can use a different method of correction if the elective contribution failure is either due to the failure to implement an automatic enrollment feature for an affected eligible employee or due to the failure to implement an affirmative election of an eligible employee in a plan that provides for automatic enrollment. These failures may be corrected under an exception to the general rule on correcting deferral errors (which requires a 50% QNEC to be made on the missed deferral amount) if the failure does not extend beyond the end of: (1) nine and a half months after the end of the plan year in which the automatic contribution or increase should have occurred, or (2) the last day of the month following the month in which the participant advises the sponsor of the problem. To illustrate the difference between the general rule and this modified form of correction, we will again use the example of Karl.

Again, assume that ABC Company hires Karl late in 2017, and Karl should have been eligible for the 401(k) plan on January 1, 2018. The plan operates on a calendar plan year, is subject to ADP testing, and provides for a matching contribution of 100% up to the first 4% of compensation. Further, the ADP for Karl’s employee group for 2018 was 3%, and Karl’s annual compensation was $100,000. But now, assume that the 401(k) plan also has an automatic contribution feature where 3% of an employee’s salary is deferred unless the employee gives an affirmative election, and ABC did not defer any of Karl’s compensation until the mistake is recognized and corrected in the first pay period of July.

ABC Company can correct this automatic contribution failure without making a contribution for Karl’s missed deferral opportunity because the failure was corrected within nine and a half months and before Karl notified the plan of the problem. But ABC has other obligations it must satisfy to avoid making the elective deferral contribution.

ABC still must make contributions for the match that would have been required had the missed deferrals ($750= $100,000 * 4/12 * .03) been made. Just like our previous example, ABC must match on 100% up to 4% of Karl’s compensation, therefore ABC must make a $750 contribution, adjusted for earnings, to Karl’s account.

ABC also must satisfy a notice requirement to qualify for this alternative correction method. ABC must provide a notice to Karl no later than 45 days after the date on which the correct deferral begins. The notice must contain general information relating to the failure, a statement that the appropriate amount will now start to be deducted from Karl’s compensation, a statement that Karl can make an affirmative election to change his deferral amount, a statement that the missed matching contribution has been made, and details about how to contact the plan.

This modified correction method is currently available, but it must be noted that the IRS guidance that permits this alternative correction method provides that this alternative correction method will no longer be able to be used after December 31, 2020.