Missed Deferrals, Late Deposits, and a Late-Looking Safe Harbor Contribution
Harborlight Medical sponsors a calendar-year 401(k) with a 3% safe harbor nonelective and a 50% match on the first 6% of pay. The plan has 85 participants. In a 2026 review of 2024, the TPA finds: (1) 22 participants had deferral elections on file, but payroll did not withhold from March 1 through June 30, 2024; the average missed deferral was $1,200 per participant; (2) all 2024 deferrals were deposited 18 days after each payroll date; (3) the 3% safe harbor nonelective for 2024 was not deposited until December 31, 2025. The CEO, age 57, deferred $23,500 in 2024 plus a $7,500 catch-up. The company wants to fix the issues without IRS or DOL involvement.
1. Can the missed deferrals and late deposits be corrected under SCP and VFCP? State the correction amounts for the missed deferrals and the excise tax if lost earnings are $1,850.
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The missed deferral opportunity can be self-corrected under SCP. The required QNEC is 50% of the missed deferral because correction is occurring after the 9½-month period following the end of the 2024 plan year (October 15, 2025). The QNEC is $600 per participant ($1,200 × 50%), or $13,200 for 22 participants, plus earnings. Had correction occurred by October 15, 2025, the QNEC would have been 25% ($300 each). The plan must also make up any missed match that would have been earned on the missed deferrals, plus earnings, and the QNEC must be 100% vested.
The 18-day deposit delay exceeds the DOL safe harbor of seven business days after withholding for a plan with fewer than 100 participants. That is a prohibited transaction under §406. Correct under VFCP by restoring $1,850 of lost earnings to the plan. The 15% excise tax under §4975 is 15% × $1,850 = $277.50, reported on Form 5330. VFCP filing protects against DOL civil penalties but does not eliminate the excise tax. The company should document the correction and consider whether the delay was systemic for prior years.
2. The 3% safe harbor nonelective deposited December 31, 2025: does this preserve safe harbor status for 2024, and what testing would apply if it did not?
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Yes. The safe harbor nonelective contribution must be funded by the last day of the 12-month period following the close of the plan year-December 31, 2025 for the 2024 plan year. A deposit on December 31, 2025 is timely, so the plan remains a safe harbor 401(k) for 2024 and no ADP/ACP test is required. The contribution still must satisfy the other safe harbor conditions, including the required notice and the 100% vesting requirement.
If the contribution had been deposited after December 31, 2025, the plan would have failed the safe harbor for 2024. It would then be subject to ADP and ACP testing, top-heavy testing, and possible corrective distributions. The 3% nonelective would still be owed, with earnings, and the employer would need to evaluate EPCRS correction. The company should not assume the December 31 deposit was late just because it was made at the end of the following year; the regulation permits funding up to that date.
3. The CEO's deferrals: is $30,500 permissible, and are there any §402(g) or §415 issues if the plan treats the missed deferrals as QNECs?
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For 2024, the §402(g) elective deferral limit was $23,000, plus a $7,500 catch-up for a participant age 50 or older. The CEO is 57, so $23,500 + $7,500 = $31,000 would be the maximum; $30,500 is within the limit and permissible if the plan permits catch-up contributions. The $23,500 figure is $500 above the regular limit but still within the combined limit because of catch-up.
A QNEC for the missed deferral opportunity is not an elective deferral, so it does not count against the CEO's §402(g) limit and is not included in the ADP test as a deferral. It is an annual addition for §415(c) purposes, however. The 2024 §415(c) limit is $69,000. The CEO's total annual additions-the $30,500 of deferrals, any match, the 3% safe harbor nonelective, and any QNEC-must not exceed the lesser of $69,000 or 100% of compensation. The QNEC should be allocated only to the affected participants and must be 100% vested.