“Does the IRS always require a plan sponsor to provide a qualified nonelective contribution (QNEC) as a means to correct a plan error where a participant was not given the opportunity to defer into the 401(k) plan when otherwise eligible to do so?”
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Colorado is representative of a common inquiry related to missed deferral elections.
Highlights of the Discussion
Generally, a QNEC is required to correct a missed deferral election. However, there are two specific scenarios that do not require the plan sponsor to make a QNEC. They apply when the error is caught early.
The first scenario involves an affirmative election 401(k) or 403(b) plan. A QNEC is not required if the failed deferral election does not go beyond three months from the time it should have been implemented. Under the IRS’s safe harbor correction method, no QNEC is required if the plan satisfies the following conditions.
- Correct deferrals begin no later than the first payment of compensation made on or after the last day of the three-month period that begins when the failure first occurred for the affected eligible employee. However, if the affected participant notified the plan sponsor of the failure within the first three months, deferrals must begin after the first payment of compensation made on or after the end of the month after the month of notification.
- The plan sponsor provides a notice to the affected eligible employee not later than 45 days after the date on which correct deferrals begin.
- If the eligible employee would have been entitled to additional matching contributions had the missed deferrals been made, the plan sponsor must make a corrective matching allocation (adjusted for earnings) on behalf of the employee equal to the matching contributions that would have been required under the terms of the plan as if the missed deferrals had been contributed to the plan.
The second scenario involves an automatic enrollment or automatic escalation plan. This correction applies when there has been a failure to implement an automatic enrollment feature and/or failure to implement an affirmative election for a participant who would otherwise be subject to the automatic enrollment feature. Here, no corrective QNEC is needed for missed deferrals as long as the contribution error does not extend past 9 ½ months after the end of the year (i.e., October 15th for a calendar year plan). However, if the plan sponsor was notified of the failure within 9 ½ months by the affected eligible employee, correct deferrals must begin no later than the first payment of compensation made on or after the last day of the month after the month of notification. The 45-day notice and matching contribution requirement mentioned above also apply.
Regarding the content of the notice, it must
- Give general information regarding the failure;
- Affirm that correct contributions to the plan have begun;
- Affirm that missed matching contributions have or will be made;
- Explain that the participant may increase his or her deferral percentage to make up for the missed deferral opportunity; and
- Provide the name of the plan and contact information.
Of course, the plan sponsor would have to implement practices and procedures to avoid the mistake in the future.
For more information on these “caught early” corrections and for correction steps for failures outside of these time frames (where a QNEC would be required), please refer to IRS Revenue Procedure 2019-19, [1]and the 401(k) Plan Fix-It Guide [2].
Conclusion
There are circumstances under which a plan sponsor may not have to make a QNEC to a 401(k) plan in order to correct a missed deferral opportunity. Plan sponsors should evaluate each missed deferral case carefully in order to apply the appropriate IRS correction method and avoid such failures in the future.