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Old 10-09-2020, 06:39 AM
246 posts, read 518,420 times
Reputation: 112


TLDR at bottom.

I posted about this separately, but basically I had changed my election for my 401K withholding in January of this year from 8% to 13%. (Was 8% late last year so I could smooth out my contributions and take advantage of each quarterly match without capping out) I received the notification from Fidelity that my new election amount was confirmed.

Well, shame on me (and yes, I should have caught this - but the election change happened at the same time I received a pay increase at work), but I did not notice that my company continued to only take out 8% throughout the year until I discovered it looking at a paystub two weeks ago. I informed my company and they admitted it was their error because someone on their side didn't update when they got the notification from Fidelity. I changed my deferral amount to 28% for the rest of the year to catch up to the $19K for the year.

So, yes, I absolutely acknowledge that I could have and should have caught this earlier. That said, I'm held to IRS guidelines so if there's an appropriate action my company should take, I'm going to inquire.

After posting on a few forums, someone brought up the fact that it's IRS regulation that if there is a deferral error by the company, the company has to contribute 50% of my missed deferrals plus missed market growth. (Of which there would have been a lot for anything going in between March and September) I brought this up to my company, and they reviewed in backrooms for over a week and a half. They finally came back with a response that due to the Safe Harbor language and the fact that automatic contributions are part of their plan, they are exempt from making a qualified non-elective contribution.

Their response specifically was: "Regarding your inquiry for correction of the missed deferrals, below is an excerpt from Appendix A.05(8) of IRS Revenue Procedure 2019-19 that exempts [Company] from making a corrective contribution because of the missed deferrals. For 401(k) plans with auto contribution features such as the [Company]Retirement Savings Plan, compensatory qualified non-elective contributions (QNECs) are not required."

I'm FAR from being an expert in any of this, but when I read the actual IRS language, it says "This safe harbor correction method is available for certain Employee Elective Deferral Failures (as defined in section .05(10) of this appendix associated with missed elective deferrals for eligible employees who are subject to an automatic contribution feature in a § 401(k) plan or 403(b) Plan (including employees who made affirmative elections in lieu of automatic contributions but whose elections were not implemented correctly). If the failure to implement an automatic contribution feature for an affected eligible employee or the failure to implement an affirmative election of an eligible employee who is otherwise subject to an automatic contribution

Here's my question: Yes, there is an automatic contribution feature in the plan. (If you make no election, it will automatically contribute 3%) However, I was at 8%, which was already a manual election, and I made a new election of 13%. The failure was unrelated to the automatic contribution feature within the plan. Is my company trying to pull a fast one on me here and incorrectly citing this "Safe Harbor" language, or does any company whose plan has an automatic contribution feature become exempt from the QNEC requirement?

TLDR: Changed my elective contribution from 8% to 13% in my 401K. Company admitted failure to update even though I received confirmation via email that it was updated. Called out company for IRS guidelines of making a 50% QNEC for missed deferral. Company is citing Safe Harbor language that they don't have to make a contribution because their plan has an automatic contribution feature. My contribution amount was already well above the automatic amount before I made the change. Does the error have to be related to the auto-contribution feature or is any company with an auto-contribution feature exempt?
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Old 10-09-2020, 08:12 AM
23,026 posts, read 17,115,020 times
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I would guess with their safe harbor out you are going to be SOL, the auto contribution combined with the plans overall testing could eliminate any matching responsibility and I think that’s where you are going to be stuck
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