What should we do if an employee’s paycheck isn’t big enough to make his or her deferral election?

[Guest Bud]

What should we do if an employee’s paycheck (after tax withholding, garnishments and health plan premiums) isn’t big enough to make his or her deferral election? Should we make as much of deferral as we can? I thought there was a government opinion that said the election is invalid, so no deferrals should be taken out.

[QDROphile]

With the advent of catch up contributions most plans increased or eliminated deferral limits. The persons who designed the plan amendments were smart and foresighted enough to provide in the plan that the election is subject to ordering based on availability of amounts after taking care of other necessary reductions of pay.

[Guest Bud]

Our plan doesn't have an ordering system. So, what should we do? Take out what is left or don't take anything?

[E as in ERISA]

I think that what QDROphile is saying is it's not what's left over (the net) or nothing, the choice is the net or something higher (depending on your ordering rules -- which should hopefully leave you at the net).

[QDROphile]

E as in ERISA is being too kind. I was being sarcastic about the quality of plan documents and related administrative documents and procedures. This is an issue that someone should have seen coming and prepared in advance.

It is still a document interpretation question, it's just that the job is more difficult now. Someone is going to have to decide the implicit ordering. At one extreme, the plan adminstrator may decide that the election form should be interpreted to mean that if the full election could not be honored, then there should be no deferral. Probably the best approach is set priotities and allow the biggest deferral from what is left when you get done covering higher priority items. For example, legal requirements, such as payroll taxes, come first. Welfare benefits through a cafeteria plan probably come next, especially health benefits. Other health benefits, such as after-tax LTD are probably next. What do you do about other savings programs such as stock purchase plans? What about other elective payroll deductions? Not easy, but you have to decide. When you decide, you should then amend plan documents or adopt and disclose formal plan procedures to apply next time. Above all, you have to real all documents, e.g. election forms, an all employee communications about payroll deduction carefully. Consider asking the individual before you set policy (although the policy cannot be that the individual gets to say each time it happens). Is this a total aberration that is going to cause the individual to miss a mortgage or rent payment or is it a systematic because they elected too big?

Don't forget to seek legal advice!

[david rigby]

What should we do if an employee’s paycheck (after tax withholding, garnishments and health plan premiums) isn’t big enough to make his or her deferral election?

Hold on here. What do you mean after tax withholding?

BTW, are you referring to a deferral election that is a $ amount (rather than a percent)? If the former, the plan should already anticipate this (see, I'm not being sarcastic) by specifying what happens if the EE elects a deferral that is "too big".

I suspect the real problem here is caused by "garnishments". Perhaps the EE elected a deferral, then received a garnishment? Maybe the solution is for the EE to reduce his deferral until the garnishment is completed. After all, the paycheck is finite.

[austin3515]

I don't think the issue is limited to $ elections vs. % elections.