In the last couple of months I have been asked a few questions about the rules surrounding missed or late deposits for retirement plans, so I think it is a good time to stop and dust off the rules and review them again. It is a good practice to review deposit history as you do your plan reviews.

When a plan sponsor mistakenly does not process a deferral election for a participant and time has passed and it is discovered, how can they correct the error?

The employer must make a corrective contribution to the participant’s account to resolve this mistake.

To correct for the “missed deferral opportunity,” a qualified non-elective contribution (QNEC) is made. The missed deferral opportunity is 50% of the deferral that was not made based on the participant’s compensation for the period in which the elective deferrals were not made, plus earnings.

The formula is __% (deferral percentage chosen by the participant) times $_____ (the participant’s compensation during the missed period). That missed deferral amount is multiplied by 50%. The result is the missed deferral opportunity. This approach applies to both pretax and Roth deferral elections.

If there was a company match in effect, the match formula is applied to the missed deferral. The employer then makes a QNEC, plus earnings, to the participant’s account.

The second question is when the plan sponsor discovers after an internal audit that participants’ salary deferrals were not deposited in the plan on a timely basis. How should that situation be fixed? 

A plan sponsor’s failure to deposit deferrals in the plan or trust as soon as they can be segregated from the sponsor’s general assets can be a fiduciary violation resulting in Department of Labor (DOL) penalties and loss of qualified status for tax purposes.

There are two correction programs available for this error: the DOL’s Voluntary Fiduciary Correction Program (VFCP) and the Internal Revenue Service’s Employee Plans Compliance Resolution System (EPCRS). The VFCP’s goal is to avoid civil penalties, while the goal of the EPCRS is to preserve the tax benefits resulting from qualified status.

To correct for late deposits, the sponsor must contribute the earnings that those late deposits missed. The earnings are what the delayed deposits would have accumulated had they been made timely, measured from the earliest date the sponsor could have segregated them from its general assets to the date the deferrals were deposited in the plan trust.

John Ludwig, ChFC, AIF, CRPS, is an LPL Financial advisor with LHD Retirement. He can be reached at

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