The Intern Who Was Never an Intern: A Two-Year Missed Deferral Correction
Rosa was hired March 15, 2022 and completed 1,050 hours in her first twelve months, so she satisfied the plan's age-21/one-year requirement on March 14, 2023 and should have entered the plan on July 1, 2023 under its semiannual entry dates. A payroll coding error flagged her as a summer intern, and she was not permitted to defer until the error surfaced on February 10, 2025. The plan is a calendar-year, non-safe-harbor 401(k) with a 100% match on the first 4% of pay; the 2023 NHCE ADP was 4.00%. Rosa never received an enrollment packet and has no deferral election on file. Her compensation was $30,000 from July 1, 2023 through December 31, 2023 and $72,000 in 2024. You are asked to prepare the self-correction in March 2025.
1. Compute the corrective contributions (QNEC and matching) that must be made for Rosa, and explain how earnings are handled.
Read the worked answer
Step 1 - Missed deferral. With no election on file, the missed deferral is measured using the NHCE ADP for the year, capped at the actual deferral percentage of the HCEs. 2023 NHCE ADP = 4.00%.
- 2023: 4.00% × $30,000 = $1,200
- 2024: 4.00% × $72,000 = $2,880
- Total missed deferral: $4,080
Step 2 - Missed deferral opportunity QNEC. EPCRS requires a QNEC of 25% of the missed deferral for an improperly excluded employee (the percentage is reduced to zero only if the exclusion is corrected very promptly, within roughly 45 days of the entry date - not the case here).
- 2023: 25% × $1,200 = $300
- 2024: 25% × $2,880 = $720
Step 3 - Matching contribution. The full match she would have received is required - the 25% discount applies only to the deferral QNEC, never to the match. 100% of the first 4%, and the missed deferral is exactly 4%.
- 2023: 4.00% × $30,000 = $1,200
- 2024: 4.00% × $72,000 = $2,880
Step 4 - Earnings. Earnings are required on both the QNEC and the match, calculated from the dates the amounts would have been deposited (payroll by payroll) to the correction deposit date, using the plan's standard earnings method (typically the plan's actual rate of return or the DOL/Fidelity Bond approach). Do not simply apply one year's return to the full amount.
Step 5 - What is not required. Her own $4,080 of deferrals is not employer money and is not contributed; she must instead be given the opportunity to elect going forward. All corrective amounts must be 100% vested and not subject to the plan's allocation or last-day conditions. 415(c) is not an issue at these levels (2023 limit $66,000; 2024 limit $69,000).
2. May the employer self-correct this failure, or must it go to VCP? Explain the analysis.
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Characterize the failure. The document says Rosa enters July 1, 2023. Payroll did not follow the document. That is an operational failure - precisely the category EPCRS self-correction addresses - not a plan document failure and not an employer eligibility failure.
SCP availability. SCP is available for insignificant operational failures and, since Rev. Proc. 2021-30, for significant operational failures corrected by the end of the third plan year following the plan year in which the failure occurred. Here:
- 2023 portion: correction deadline December 31, 2026.
- 2024 portion: correction deadline December 31, 2027.
- A March 2025 correction is well inside both windows.
Significance. Weigh: one participant, roughly 18 months of missed deferrals, corrective employer money in the low thousands, no pattern, no discrimination motive, and a root cause (a payroll coding flag) that can be documented and fixed. That is an insignificant failure on the facts-and-circumstances standard, so SCP is available even without relying on the three-year extension.
Conclusion. Self-correct. Document the failure, the methodology, the missed deferral calculation, the earnings computation, and the corrective deposit; adopt procedures to prevent recurrence. No VCP filing and no user fee are needed. VCP would be required only if the failure were egregious, spanned many employees, or involved a document provision that itself was defective.
3. How would the correction change if the file showed that Rosa had submitted a signed 10% salary deferral election in June 2023 that payroll never processed?
Read the worked answer
The measurement of the missed deferral changes; the 25% and 100% rules do not.
Missed deferral becomes the elected rate, not the NHCE ADP. Once an affirmative election exists, the missed deferral is the amount she actually elected. Using 10%:
- 2023: 10% × $30,000 = $3,000
- 2024: 10% × $72,000 = $7,200
- Total missed deferral: $10,200
QNEC at 25%.
- 2023: 25% × $3,000 = $750
- 2024: 25% × $7,200 = $1,800
Match is unchanged at $4,080. The formula caps at 4% of pay, and a 10% election exceeds the cap, so the match is still 4% × compensation: $1,200 for 2023 and $2,880 for 2024. It is still contributed at 100% of what she would have received.
Earnings are recomputed on the larger amounts from each would-be payroll date.
Two practical points. First, the employer does not get to contribute her $10,200 of deferrals - the employee's own money is never part of the correction; she is simply made whole through the QNEC and match plus earnings. Second, when an election on file was ignored, be sure the underlying election form is actually signed and dated and that the plan's enrollment procedures made it valid; if the form was never processed into the recordkeeper's system, the same 25% QNEC methodology applies, but the missed deferral is still measured by her election rather than the NHCE ADP. The plan should also confirm the 2023 correction does not push any annual addition over the 415(c) limit - it does not at these dollar levels.