How to Correct Missed Participant Deferrals

Did you miss participant deferrals in your 401(k) plan? Failing to execute a participant’s election to defer is a common 401(k) plan administration mistake.  

This can occur by:  

  • Missing a participant’s initial deferral election  
  • Not deferring on eligible compensation  
  • Missing an increase in the deferral rate 

Each case results in missed earnings and taxable compensation issued to the participant rather than being added to their 401(k) accounts. Luckily, the IRS allows corrections of these mistakes. 

Correcting Missed Deferrals 

Employers can make a correction by making a corrective of 50% of the missed deferral, adjusted for earnings on the participant’s behalf. The participant is fully vested in these contributions, and they are treated the same as participant elective deferrals for distribution purposes. 

MISSED PARTICIPANT DEFERRALS for HIGHLY COMPENSATED EMPLOYEES  

If the participant is a highly compensated employee, a correction could cause the plan to fail ADP testing. You should also consider all plan and IRS limits. 

If the correction would bring the participant’s contribution over $24,500 for 2026, the correction should be reduced so that this limit is not exceeded, assuming the participant in not over the age of 50 and eligible for catch-up contributions.  

Missed Deferral Correction Examples:  

  • Participant A is currently deferring at 5% and elects in June to increase her deferral to 10%. This deferral was never processed, and she continued to defer at the 5% rate through the end of the year. The plan compensation for the missed deferral is determined to be $30,000. Her missed deferral amount is $1,500 and the correction is $750. In this assumption, the participant is not highly compensated and is not in danger of going over the IRS limit. 
  • Participant B is 38 years old and is currently deferring 20%. He has a base pay of $90,000 but received a bonus of $20,000 that was eligible plan compensation but did not have deferrals withheld. The missed deferral for Participant B is $4,000. The missed contribution or  correction is $2,000. However, as he already contributed $18,000 and is under the age of 50, the correction would be $6,500 for 2024. 

In both of the above cases, corrections are only for the missed deferrals. These corrective contributions must also be adjusted for earnings on the missed deferrals. Calculate them from the date that the elected deferrals were to be made through the date of the corrective contribution. You should also give consideration to any missed company contributions, if applicable. 

HOW TO AVOID MISSED PARTICIPANT DEFERRALS 

As a last step, determine why the deferrals were missed and create procedures to ensure this issue doesn’t recur. The IRS has additional information about correction programs and examples on how to correct issues with your plan. 

Retirement plans can be very complex. As an innovative firm, Anders specializes in 401(k) audits. We can offer entirely off-site assistance with little or no distraction to your daily office routine.  We also offer flat-fee pricing so there are no surprises on your bill when the job is complete. 

To get started, request a free 401(k) audit consultation below or contact the team at (314)-886-7913 to schedule an appointment. 

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