A missed deferral opportunity is what the IRS calls the failure to let an eligible employee make elective contributions to a 401(k) or similar retirement plan when they should have been able to. The employer fixes it by depositing a corrective employer contribution called a Qualified Non-Elective Contribution (QNEC) equal to 0%, 25%, or 50% of what the employee would have deferred, plus 100% of any employer match the employee would have earned, with both amounts adjusted for lost investment earnings. The QNEC percentage depends entirely on how fast the employer catches and corrects the error.
The Two Failures That Trigger a Correction
A missed deferral opportunity shows up in one of two ways. In the first, an eligible employee is simply left out of the plan: no enrollment materials, no deferral election, no payroll deduction. Onboarding errors, misclassified employment status, and payroll systems that don’t flag newly eligible workers are the usual causes. In the second, the employee submitted a valid salary reduction election and the employer failed to implement it, so the deferrals the employee actually chose never came out of their paycheck.
Both count as operational failures because the plan didn’t run the way its written terms require. And both deprive the employee of tax-advantaged savings, compounding growth, and any employer match tied to their deferrals, which is why the IRS requires a real dollar correction rather than an apology.
What the Employer Has to Contribute
Since the employee can’t retroactively contribute their own salary, the employer deposits the QNEC on their behalf. A QNEC is always a pre-tax employer contribution, even when the employee would have made Roth deferrals. It vests immediately and is subject to the same withdrawal restrictions as elective deferrals.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
On top of the QNEC, the employer has to contribute 100% of any matching contribution the employee would have received based on the missed deferrals. The match piece is fully vested and is never reduced, no matter how fast the correction happens. Only the QNEC percentage moves with the correction timeline.
Calculating the Missed Deferral
Before applying a QNEC percentage, the employer needs a dollar figure for what the employee would have contributed. The method depends on which failure occurred.
Employees Who Were Never Given the Chance to Elect
When there is no election on file because the employee was excluded outright, the missed deferral is estimated using the actual deferral percentage (ADP) of the employee’s group, either highly compensated or non-highly compensated, for the year of the failure. Multiply that ADP by the employee’s compensation for the year. A non-highly compensated employee who earned $80,000 in a year when the group’s ADP was 8% has a missed deferral of $6,400. At the full 50% QNEC rate, the corrective contribution would be $3,200, plus an earnings adjustment.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
For plans with automatic enrollment, the missed deferral is based on the plan’s default contribution rate rather than the group ADP. A 3% auto-enrollment default drives the calculation at 3% of compensation.
Employees Whose Election Was Ignored
If the employee actually submitted an election and the employer failed to act on it, no estimate is needed. The missed deferral is the employee’s elected percentage applied to compensation during the affected period. An employee who elected 10% and earned $20,000 while the election went unimplemented has a $2,000 missed deferral; a 50% QNEC on that is $1,000, plus earnings.2Internal Revenue Service. Correcting a Failure to Effect Employee Deferral Elections
How Correction Speed Sets the QNEC
The IRS ties the QNEC percentage directly to how fast the employer acts. Moving quickly can eliminate the QNEC on the missed deferral entirely.
- 0% QNEC. Correct deferrals begin within three months of the failure, the employer sends the required 45-day notice, and any missed match is contributed in full.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
- 25% QNEC. Correct deferrals begin by the last day of the third plan year after the year the failure started, and the 45-day notice is delivered within 45 days of when correct deferrals begin.
- 50% QNEC. Neither deadline above is met.
The QNEC tiers apply only to the missed deferral piece. The missed match is always 100%, always vested, and always adjusted for earnings.
The 45-Day Notice to the Employee
Qualifying for either the 0% or 25% tier depends on giving the affected employee a written notice within 45 days of when correct deferrals begin. Miss that window and the QNEC jumps to the next tier even if payroll was fixed on time.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
The notice has to describe what went wrong and during what period, state the corrective contribution amount going into the employee’s account, confirm the date correct deferrals will begin or resume, remind the employee they can adjust their deferral percentage going forward, and provide plan contact information for questions. Because the notice is a gatekeeper for the reduced QNEC, it’s worth drafting before the payroll fix so both steps happen together.
Adjusting for Lost Earnings
Every dollar of the correction, both the QNEC and the missed match, is adjusted for investment earnings from the date the contribution should have been made through the date it’s actually deposited. The idea is to put the employee where they would have been had the error never happened.
The earnings calculation uses a reasonable rate of return. If the employee already had investment elections on file from a prior enrollment period or another plan account, those elections drive the calculation. If not, the plan’s qualified default investment alternative is used. Most third-party administrators run daily fund returns, which can produce a slightly different number than an average annual rate; either approach works as long as it’s reasonable and applied consistently.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
Which IRS Correction Program Applies
Missed deferral opportunities are operational failures that get fixed through the Employee Plans Compliance Resolution System (EPCRS), governed by Revenue Procedure 2021-30. EPCRS offers three routes.3Internal Revenue Service. EPCRS Overview
Self-Correction Program
Under the Self-Correction Program (SCP) the plan sponsor fixes the error internally without filing anything with the IRS. The IRS distinguishes between “significant” and “insignificant” failures based on factors including the percentage of plan assets involved, the number of employees affected relative to total participants, how long the failure lasted, and why it happened. No single factor is decisive, and the agency applies the test in a way that avoids penalizing small plans for their size.4Internal Revenue Service. Self-Correction Program (SCP) FAQs
Insignificant failures can be self-corrected at any time. Significant failures used to have to be corrected by the last day of the third plan year following the year of the failure, but Section 305 of the SECURE 2.0 Act made the self-correction period for eligible inadvertent failures indefinite. A sponsor can now self-correct a missed deferral opportunity with no fixed deadline, as long as the IRS hasn’t already flagged the failure on audit and the correction is completed within a reasonable time after discovery.5Internal Revenue Service. Guidance on Section 305 of the SECURE 2.0 Act of 2022
Voluntary Correction Program
The Voluntary Correction Program (VCP) is a formal filing with the IRS on Form 8950, with a description of the failure, the proposed correction, and a user fee based on total net plan assets. VCP is now most useful when the sponsor wants a formal IRS sign-off on the correction, or when the failure doesn’t qualify as inadvertent because it stems from a systemic policy choice rather than an administrative slip.6Internal Revenue Service. Voluntary Correction Program (VCP) Fees
Audit Closing Agreement Program
If the IRS finds an uncorrected missed deferral opportunity during a plan audit, the correction moves to the Audit Closing Agreement Program (Audit CAP). The monetary sanction is negotiated and is always higher than the VCP fee would have been. The IRS sets the amount based on the severity of the failure, how many employees were affected, whether non-highly compensated employees bore the brunt, how long the problem persisted, and whether the sponsor had internal controls designed to catch it.7Internal Revenue Service. Audit Closing Agreement Program (Audit CAP) – General Description
Employees Who Have Already Left
The obligation to correct doesn’t disappear when the affected employee leaves. The QNEC and any missed match still have to be deposited on their behalf, which sometimes means locating former employees. The Department of Labor has outlined minimum search steps for missing participants, including certified mail to the last known address, checking related employer and plan records, contacting a designated beneficiary, and using free electronic search tools, with commercial locator services and credit reporting agencies also acceptable. Deposit the corrective amounts even if the participant hasn’t been located yet, and document the search effort in case the IRS or DOL reviews it later.8Internal Revenue Service. Missing Participants or Beneficiaries
A Note on Annual Contribution Limits
A corrective QNEC is treated as an annual addition for the limitation year to which it relates, not the year the correction is deposited. A 2024 missed deferral corrected in 2026 counts against the 2024 Section 415(c) annual additions limit. That matters mostly when the employee was already near their cap in the year of the error.9Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
What to Do When You Find the Error
Start by identifying every affected employee and every pay period during which the failure occurred. For each employee, determine whether they had an election on file (use their actual percentage) or were excluded without ever electing (use the group ADP, or the auto-enrollment default if the plan has one). Calculate the missed deferral, apply the QNEC percentage that matches your correction timing, compute the missed match, and adjust everything for lost earnings through the anticipated deposit date.
Send the 45-day notice before depositing the correction if you’re aiming for the 0% or 25% tier, and start correct deferrals from the employee’s paycheck right away. Deposit the QNEC, missed match, and earnings adjustments as soon as the calculations are final. Keep a written record of the discovery date, calculation methodology, copies of the notice, proof of deposit, and the earnings computation. For a small number of affected participants and modest dollar amounts, self-correction under SCP will usually work without any IRS filing. For larger or more tangled failures, it’s worth running the choice between SCP and VCP past the plan’s ERISA counsel or third-party administrator before you deposit anything.1Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election