Missed Deferral Opportunity
Correcting an MDO depends on several factors, including when the MDO occurred, when it was identified, when correct deferrals started, and plan design features.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants 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, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Minnesota is representative of a common question on missed deferrals.
“One of my clients with an auto-enroll 401(k) plan just discovered they did not apply deferral election changes effective after June 22, 2025, made by participants in advance of bonuses they were to receive. The recordkeeper calculated the missed deferral opportunity to be about $100,000. The plan sponsor sought guidance on AI (1) and was instructed, ‘Since the missed deferrals were tied to bonus payments—not a failure to implement automatic enrollment under your EACA—the special 0% QNEC relief for automatic enrollment errors does not apply and a 50% QNEC is required to correct this.' Is that accurate?"
Highlights of the discussion
No, the AI response is not accurate in this case. While the plan sponsor would have to contribute any matching contributions with earnings that were missed as a correction, because of the circumstances, no QNEC was required.
While AI offers benefits, it cannot replace expert human guidance for interpreting complex and evolving industry rules and regulations. Relying on AI alone could have exposed the plan sponsor to a costly, unnecessary QNEC of $50,000 plus earnings in this example.
A missed deferral opportunity (MDO) is a common 401(k) operational failure that must be corrected to avoid jeopardizing the plan’s tax-qualified status. Some of the most common scenarios that can result in an MDO include:
Failure to allow a participant to defer upon eligibility
Failure to implement a deferral election (including catch-up election, if plan permits)
Failure to implement automatic contribution arrangement (ACA) features (i.e., auto-enrollment, auto-escalation)
Use of an incorrect definition of compensation for deferral purposes
The IRS offers a framework for correcting this mistake through the Employee Plans Compliance Resolution System (EPCRS) governed by Revenue Procedure 2021-30, which has been significantly simplified by SECURE 2.0:
Notice 2023-43 (Section 305) updates the Self-Correction Program (SCP) to cover more errors and eliminates the three-year correction deadline to correct most eligible inadvertent failures (EIFs).
Notice 2024-2 (Section 350) indefinitely extends the safe harbor correction for elective deferral failures that occur in plans that have an ACA feature (MDOs do not have to be related to an ACA feature) and covers failures for terminated participants.
How to correct a MDO depends on several factors, including when the MDO occurred, when it was identified, when correct deferrals started, and plan design features. That is why it is important to seek expert guidance. A “best practice” is to be proactive and establish self-audit requirements with the intent to identify and rectify any administrative errors in a timely fashion. When an MDO is discovered, it is important to act quickly:
Stop the error.
Calculate and contribute corrective contributions plus earnings, if required.
Provide a 45-day notice to participants.
Update already established processes and procedures.
Document everything.
Summary of MDOs corrected under SCP after December 31, 2023
Refer to Rev. Proc. 2021-30 for specific details
Situation | Corrective Action | Key Conditions |
Plan with ACA | 0% QNEC for missed deferrals + 100% of any missed match (plus earnings). | Correct deferrals must begin by the earlier of 1) the first payroll date after the 9½ month correction period expires OR 2) the first payroll date on or after the last day of the month after the employee notifies the employer of the error. A specific notice must be provided within 45 days. Applicable to both active and terminated employees. |
Plan without ACA - Short-Term Error | 0% QNEC for missed deferrals + 100% of any missed match (plus earnings). | Correct deferrals must begin within 3 months of the failure, and the required notice provided within 45 days. Applicable only to active employees. |
Plan without ACA - Long-Term Error | 25% QNEC of missed deferral + 100% of any missed match (plus earnings). | Correct deferrals must begin by the end of the third plan year following the year of the failure, and the required notice provided within 45 days. Applicable only to active employees. |
Failure to Meet Reduced QNEC Conditions | 50% QNEC of missed deferral + 100% of any missed match (plus earnings). | This is the default or standard correction method when conditions for reduced QNECs (0% or 25%) are not met. |
Conclusion
MDOs can be costly and time-consuming to fix. Prevention is the best approach with processes and procedures in place. If a mistake is identified, it is important to correct the error as soon as possible according to the IRS’s guidance, and document decisions and actions related to the error and the correction.
(1) Artificial Intelligence
