How To Correct Mistaken Elective Deferral Exclusions

Q: We recently discovered that we improperly excluded an employee from the right to make elective deferrals to our 403(b) plan. Do the experts know how we can correct this error?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer: 

A: We do! Revenue Procedure 2021-30 outlines correction steps based on the length of the exclusion. In many cases, this type of error requires a corrective contribution to the plan to be made by the plan sponsor, equal to (1) a portion of the employee’s missed deferral, plus (2) 100% of any missed matching contributions, plus (3) earnings. However, the contribution under (1) may be avoided completely if:

• The failure does not exceed three months (or the end of the month after the month during which an affected employee notifies the plan sponsor of the error, if earlier) and notice is provided within 45 days of the date on which correct deferrals begin; or
• Correct deferrals begin within 9 ½ months after the end of the plan year in which the error first occurred (or the last day of the month after the month during which an affected employee notifies the plan sponsor of the error, if earlier) and notice is provided within 45 days of the date on which correct deferrals begin. (This provision was set to sunset at the end of this year, but it was extended by SECURE 2.0. This provision was also historically applicable only in the automatic enrollment context, and, pending additional guidance to the contrary, there is no clear indication that the SECURE 2.0 provision would be applicable outside the automatic enrollment context.)

In all cases, plan sponsors must also contribute missed matching contributions (if any), plus earnings.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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