Occasionally, an employer may determine that it did not withhold deferral contributions for a new employee in accordance with the terms of its 401(k) plan. If the plan has an automatic enrollment feature, and the error is found within 9 1/2 months after the end of the plan year in which the error occurred, the cost to correct the error is reduced if the employer provides the employee with a notice of the error within 45 days of the date that deferrals are started.
The notice must include general information about the error, such as the time when deferrals should have started and the percentage that would have been deferred, the approximate date when deferrals will begin, confirmation that a corrective match has or will be made, a description of how the employee may increase his or her deferrals to make up for the missed deferral opportunity, the plan name, and the name, address and telephone number of a plan contact.
If this notice is provided timely, then the employer contribution consists solely of the match that the employee would have received if contributions had started on a timely basis. If timely notice is not given, then the employer also owes a missed deferral contribution of 50% of the amount that would have been withheld from the employee’s pay if deferrals had started timely.
Similar rules apply for failure to correctly withhold salary deferrals from a non-automatic enrollment plan. While these safe harbor rules have been in existence since 2015, we still encounter clients who do not know that by providing notice of the correction within 45 days of the date that deferrals commence they may reduce their correction costs.