The IRS says that when an employer fails to give all employees an opportunnity to make a salary deferral, one should take the following actions.
- Perform a review of the plan and its operation.
- Review employees who received a W-2 but didn’t participate.
- Determine if you excluded any class of employees such as janitors, cafeteria workers, bus drivers or union employees.
- Provide improperly excluded employees the opportunity to participate in the plan in current and future years.
- Make a corrective contribution to the plan for the employees that compensates for their missed deferral opportunity.
To avoid making such a mistake in the future, the IRS suggests:
- Understand which employees you may exclude from the 403(b) plan.
- Provide proper notification to employees of their eligibility to participate in the 403(b) plan at least annually.
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