Did Your 401(k) Payroll Deductions Go Missing? The IRS Has New Fix-It Rules

Quick Read

• The IRS now says employers that missed a 401(k) election must add a $3,000 QNEC plus $1,800 in lost matching money, for a total of $4,800.

• An auto-enrollment safe harbor now permanently removes the QNEC requirement for deferral failures corrected within 9½ months, and it also applies to SEP and SIMPLE IRA plans.

• Problems corrected within three months do not require a QNEC, while errors that last as long as three years require a smaller 25% QNEC instead of the usual 50%.

• Building a portfolio and living off it are two very different skills, and few people are taught the second one. This issue is what The Definitive Guide to Retirement Income addresses, and it is free to read now. (Sponsor)

A missed 401(k) deduction may be hard to spot on a pay stub. If it continues for a year, it can wipe out a full year of saving, along with the employer match that should have been added.

The IRS has revised the rules employers use to correct these mistakes. Rev. Proc. 2026-34, issued on October 22, 2026, “modifies and supersedes Rev. Proc. 2021-30.” It also incorporates correction changes from the SECURE 2.0 Act, enacted on December 29, 2022. Here is what that means if your contributions never reached your account.

What a Missed 401(k) Election Costs, Based on the IRS Example

The guidance includes an example. Employee T chose to defer 10% of pay for 2024, but the election “was not processed.” T earned $60,000, so the missed deferral was $6,000.

Under the standard correction, the employer must make a qualified nonelective contribution, or QNEC, equal to 50% of the missed deferral. That comes to $3,000. The employer also owes the lost match of $1,800, bringing the total to $4,800 before any investment earnings.

There is also a tax wrinkle. The QNEC is made pre-tax: it “may not be treated as designated Roth contributions (and may not be included in an employee's gross income).” By contrast, the $6,000 that was never deferred was paid out in wages and taxed normally.

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Auto-Enrollment Safe Harbor No Longer Has an End Date

Section 350 of SECURE 2.0 created Code section 414(cc). It “generally reinstates the safe harbor method” that allows employers to fix deferral failures in automatic enrollment or escalation plans without a QNEC. The new procedure makes four changes:

• It removes “the December 31, 2023, sunset of the safe harbor correction method”

• It extends the method “to SEP Arrangements and SIMPLE IRA Plans”

• It applies to “terminated employees”

• It requires the corrective match “within a reasonable period” after correct deferrals begin, or would have begun but for termination

To qualify, the failure must be fixed no later than the 9½-month period after the end of the plan year, and the employer has to provide notice within 45 days after correct deferrals begin. A match deposited by “the last day of the twelfth month” after deferrals restart is considered timely. If the plan’s default investment lost money, those losses cannot reduce the required match correction.

Example 16 shows how this works. An employer discovered on March 1, 2025 that four employees hired in June 2024 had been left out of the plan. It enrolled them at 3% on April 1, 2025 and sent notice on May 1, 2025. No corrective contribution was owed for the missed deferrals. Making up the lost savings is left to the employees, which is why the notice must tell them they may increase their deferral rate, “subject to applicable limits under section 402(g).”

Longer-Running Errors Cost Employers 25%

For any plan, a failure corrected within three months does not require a QNEC. If the mistake lasts longer but is fixed within three years after the plan year in which it began, the employer owes a 25% QNEC instead of the higher amount. Eligibility is determined employee by employee: a failure that began in 2023 can use this method through the 2026 plan year, while one that began in 2019 cannot.

How to Catch a Missed Contribution Before It Snowballs

Correcting the mistake is the plan sponsor’s responsibility, but someone has to spot it first. Here is what to check:

1. Compare the 401(k) line on each pay stub with the percentage you elected.

2. Make sure deposits and the employer match appear on your plan statement.

3. After a new hire or rehire, confirm that automatic enrollment actually started.

4. Report any problem to the plan contact in writing. Once you do, correct deferrals must begin by “the first payment of compensation made on or after the end of the month after the month of notification.”

Former employees are entitled to “the same correction,” although their notice may leave out some details. One of the most common mistakes is accepting a correction notice at face value. It shows the percentage that was missed and the estimated start date, but it “need not include a statement of the dollar amounts.” You will need to calculate that number yourself, then decide whether to raise your contributions to make up the shortfall.

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