Did Your Employer Botch Your 401(k) Contributions? The IRS Updated the Rules for Fixing It
A single unprocessed payroll election can quietly erase a full year of retirement savings and every dollar of employer match that should have followed. The IRS just rewrote the rulebook employers use to make that right, and the details reveal…
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A missing 401(k) deduction barely shows up on a pay stub. Let it run for a year and you lose a year of savings, plus the employer match that should have come with it.
The IRS has updated the rules employers follow when they fix these errors. Rev. Proc. 2026-34, dated October 22, 2026, “modifies and supersedes Rev. Proc. 2021-30”. It also writes in the correction changes from the SECURE 2.0 Act, which was enacted on December 29, 2022. Here’s what that means if your contributions never made it into your account.
What a Missed 401(k) Election Costs, Using the IRS’s Own Example
The procedure includes a worked example. Employee T elected to defer 10% of pay for 2024, but the election “was not processed.” T made $60,000, which sets the missed deferral at $6,000.
Under the standard fix, the employer deposits a qualified nonelective contribution (QNEC), which is employer money paid into your account, equal to 50% of the missed deferral. That comes to $3,000. The employer also owes the lost match of $1,800, so the total is $4,800 before investment earnings.
There’s a tax catch too. The QNEC goes in pre-tax: it “may not be treated as designated Roth contributions (and may not be included in an employee’s gross income).” Meanwhile, the $6,000 you never deferred came home in your paychecks and was taxed as wages.
Auto-Enrollment Safe Harbor No Longer Expires
Section 350 of SECURE 2.0 created Code section 414(cc). It “generally reinstates the safe harbor method” that lets employers fix deferral failures in automatic enrollment or escalation plans with no QNEC at all. The new procedure makes four changes:
- It eliminates “the December 31, 2023, sunset of the safe harbor correction method”
- It extends the method “to SEP Arrangements and SIMPLE IRA Plans”
- It covers “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 can’t run past the 9½-month period after the end of the plan year, and the employer must send notice within 45 days after correct deferrals start. A match deposited by “the last day of the twelfth month” after deferrals restart counts as reasonable. If the plan’s default fund lost money, those losses can’t reduce the required match correction.
Example 16 shows how this plays out. 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. It owed no corrective contribution for the missed deferrals. Making up those lost savings is left to the workers, which is why the notice has to tell them they may raise their deferral rate, “subject to applicable limits under section 402(g).”
Errors That Run Longer Cost Employers 25%
In any plan, a failure fixed within three months needs no QNEC. A failure that lasts longer but ends within three years after the plan year it began calls for a 25% QNEC in place of the higher amount. Eligibility is decided employee by employee: a failure that started in 2023 can use this method through the 2026 plan year, while one that started in 2019 can’t.
Fixes the IRS Added After Public Comments
- Partial years: Certain correction methods now expressly apply to “partial plan year failures.”
- After-tax contributions: The reduced-QNEC safe harbor now covers them, at 20% of the missed after-tax amount.
- New calculation: The procedure adds a way to figure the missed deferral when “all non-highly compensated employees are improperly excluded.”
The same law “expands SCP to permit self-correction of Eligible Inadvertent Failures.” In other words, employers can fix more errors without filing with the IRS. A fix finished by the later of the end of the third plan year after the failure or 18 months after it was identified is deemed reasonable.
How to Catch a Missed Contribution Before It Grows
Fixing the error is the plan sponsor’s job, but someone has to notice it first. Here’s what to check:
- Match the 401(k) line on each pay stub against the percentage you elected.
- Confirm that deposits and the employer match show up on your plan statement.
- After a new hire or rehire, make sure automatic enrollment actually started.
- Report a 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 owed “the same correction”, though their notice can leave out some details. The most common errors is taking a correction notice at face value. It shows the percentage you missed and the estimated start date, but it “need not include a statement of the dollar amounts.” You’ll need to work out that figure yourself, then decide whether to raise your contributions to catch up.
Contact [email protected] for any questions or corrections.
Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
