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A recent call with a financial advisor in California is representative of a common question in plan administration.
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 participant elected to make voluntary after-tax (non-Roth) contributions to the plan, but due to a payroll error, the contributions were not withheld. How does the plan correct this error?”
The plan should follow the corrective procedures in the IRS’s Employee Plans Compliance Resolution System (EPCRS). This type of operational failure is considered a "missed opportunity to make after-tax employee contributions."
EPCRS provides a pre-approved correction method. Under Revenue Procedure (Rev. Proc.) 2021-30, Appendix A, Section .05(5)(b), the plan sponsor generally corrects the error by making a Qualified Nonelective Contribution (QNEC) equal to 40 percent of the participant's missed after-tax employee contribution amount.
An exception may apply for certain brief failures corrected early enough in the plan year to allow the participant to make up the missed non-Roth after-tax contributions. If the participant is provided with the opportunity to make after-tax employee contributions for at least the last nine months of the plan year and, during that period, can contribute at least the maximum amount that would have been permitted had the failure not occurred. In that case, no corrective contribution for the missed after-tax contribution opportunity is required, although any applicable corrective matching contribution must still be made [see Rev. Proc. 2021-30, Appendix B, §2.02(1)(a)(ii)(F)]
Any corrective QNEC made must be adjusted for earnings through the date the correction is made. The corrective allocation may, but is not required to be, reduced for losses (see Rev. Proc. 2021-30, Section 6.02(4)(a)].
If the missed after-tax contributions would have generated employer matching contributions under the terms of the plan, the plan sponsor must also make the applicable corrective matching contribution, adjusted for earnings. Also, if the plan has an actual deferral percentage (ADP) or actual contribution percentage (ACP) testing failure, that failure generally must be corrected before applying this correction method.
SECURE 2.0 expanded the Self-Correction Program (SCP) for Eligible Inadvertent Failures. Under Notice 2023-43, a qualifying failure may generally be self-corrected if the applicable conditions are satisfied, including completion of the correction within a reasonable period after the failure is identified. For most failures, correction by the end of the 18th month following identification is treated as occurring within a reasonable period.
A failure to implement a participant’s election to make non-Roth after-tax employee contributions is an operational failure with a specified correction method under EPCRS. Depending on the facts and circumstances, the special rule for brief failures may eliminate the corrective contribution otherwise required for the missed after-tax contribution opportunity. In addition, the failure may be eligible for self-correction under the expanded SCP rules of SECURE 2.0 and Notice 2023-43.