hr for me

One bone to throw the participant is that one Roth contribution started the 5 year clock so if she does decide to do a Roth contribution later, it would be to her benefit to leave that one on the books for taxability purposes of earnings in the Roth account. That said, I have to agree that I would not recharacterize it if that is what she originally chose, even for just one payroll period because not only is it a plan issue, but also a tax/payroll issue.

Ouch...I honestly wouldn't want to be working with or for them as I have to agree it very much goes against PPACA and possibly many of the other issues you bring up along with others. I wish I knew enough to answer your specific questions, but I do know the whole situation is a bad one. I would definitely be seeking legal counsel (both internal and ERISA- knowledgeable) I see a large part of the issue as it sounds to be an annual election which makes it sound more like a "pay to not play". (Versus a one time election at hire where if they later choose to participate at any level after turning it down at hire, they would have to pay 100% of the costs out of their larger salary.) They also shot themselves in the foot because most plans want the young and healthy single employees to participate to help their claims ratio. I have to wonder if there isn't a disparate impact issue for age discrimination if only the younger employees chose to take the larger savings ( say 2 to 1) over the older employees with families who were getting more of a 1 to 1 benefit? There have also been some rumblings from the EEOC regarding discrimination because a worker is a parent and that is used against the employee in some fashion.

Don't know anything about this specific company but I've been in the business quite a long time and would ask how often you reconcile? We used to do it at least quarterly if not monthly. But that was back in the day where it was mostly paper. I guess with electronic access the business practice of getting written monthly/quarterly statements has gone by the wayside?

I'd also see if any of the parties have an E&O insurance policy that would cover this type of error. If not, they might consider it. Especially if they aren't well versed in administering plans.

To you too!

You need to read: irs.gov/Retirement-Plans/IRS-One-Rollover-Per-Year-Rule and see how it applies to your examples. Basically it sounds like loophole #1 has been corrected by the IRS to keep people from taking multiple short term loans against their IRAs

well, texas doesn't have state income tax, so no they wouldn't tax it.

I agree that I would see it as a not counted. I guess I would also see how many employees it actually pushed into the FT mark. If you are only paying out say at the end of each year, etc. I wouldn't think it would change your overall numbers too terribly much. .

Coming at this from a payroll perspective -- I think they have constructive receipt issues on ALL the income and the IRS will not like this at all. This was not a mistake, but a changing of their minds. From a payroll/tax perspective this is a nightmare approach especially if they have also already submitted FIT/FUTA/FICA and then any state consequences. I don't see where this could be claimed a mistake in fact. They got the compensation, they have deferral elections in place, etc. This is just bad planning on their parts. If I were their accountant, while it does cost them more in taxes, I would suggest leaving it as is and doing a cash investment of the net pay back to the company. Because might just cost more than they had in taxes to fix all the different parts (of which the 401k deductions are just one). Add in loan repayments and it gets even nastier.

I have the same thought as mphs77....are they rolling each distribution to an IRA or actually returning them back to the plan as a rollover in? If so, when they are taking the distribution who is the payee? Is withholding being withheld? Who is having to pay all the administrative fees? Hopefully the specific participant! Something sounds very smarmy about this and it just doesn't pass the smell test for me, but what do I know? (and it's been a very bad work day....the one that says stick a fork in me, I'm done...so this situation would be one I would try to correct in the next round of plan amendments if possible!)

I'd include a general statement in the SPD or in other communications about moving money between funds/investment choices rather than a statement on any one specific fund, because I agree it would be hard to keep them all up to date for that one aspect. And that if they have a specific question about a specific fund to speak with their investment advisor (if one is a available through the plan or if they need one individually). I do remember personally that when trading (either IRA funds or 401k funds don't remember) that often I would get a pop-up regarding the time between this sale trade and when I could buy-in OR between the buy-in and the sale. Not sure that was specific to the investment fund though.

You need to get a copy of the PEO contract/agreement that defines their new role. I am a bit curious why the PEO isn't offering advice as that is going to be their new role. I would expect them to tell the client what is needed to close their plan to become part of the PEOs plan. They must have had dealt with this ALOT. (I wasn't around when our company went TO the PEO but was hired to pull them OUT of the PEO. I know that there was a prior plan that had to be closed/terminated when they moved to the PEO. All the employees were rehired by the PEO and became immediate participants in their plan. I think most rolled there balances to the PEO, but I don't think they were required to do so. But that's been a good 15+ yrs ago. I know they didn't take terminated employee balances because I had one unexpectedly show up about 7 years ago and he still had money in the old plan (without my knowledge-- we had moved locations and weren't getting any statements or letters). I wouldn't expect to stay their TPA as that is usually a role the PEO takes to save the client some money.

Were the deductions for 401k deferrals or for other payroll deductions that come out of the 401k earnings definition? Otherwise this scenario doesn't make sense to me! Or are you saying the match formula (or earnings it is calculated on) isnt' the same formula for the deferrals? So you match more on those that defer less? I hope not... Honestly I haven't seen any plan where the match compensation is different from the deferral compensation! I guess I am not understanding how your deferrals could be correct and your match could be wrong (While I don't support payroll companies doing 401k administration, I strongly support someone in HR/Benefits checking payroll registers for deductions/earnings that affect the plans they administer! I always wonder how it takes 6 months to find an error. But I guess because I am over both HR and payroll, I tend to review them from both viewpoints and never assume payroll has anything correct without confirmation!)

Have to agree I haven't seen it excluded before, except possibly by the fact that the employee isn't eligible for the plan until some time after hire or possibly isn't eligible for employer match due to the eligibility reasons. So it was covered by eligibility more than the definition of fringe benefits or compensation.

Years ago, we got a letter from the IRS looking for missing 5500s from an old plan that had never been filed (when I was hired I wasnt' even told that plan existed and it was fully terminated!) I had started a new plan and used the same plan number without realizing it (we were with a PEO in between the last HR/benefits employee and myself) I was able to DFVCP but our letter from the IRS didn't have any late penalties. I have to wonder if this isn't the first letter, but the one that finally got someone's attention? At the time I was told in our situation that since we hadn't been notified by the DOL that we could still do the DFVCP, but it's been a few years and the rules could have changed.

Unless it is a very large amount and worth doing a lot of work and a 2nd set of distributions, I totally agree with rcline46. Sometimes you just refuse it.

agreed. Hindsight is 20/20 and I would have called the DOL first (because yes, it is illegal for them to do what they did of changing the distribution options) or an attorney before signing. I too would get some legal advice from an attorney who can know all the details and who can read the agreement. Sometimes those agreements can be very different based on state laws. Sometimes they are only enforce-able for certain reasons and can't be coerced, which it sounds like it might have been. only you and an attorney can decide if you want to try to break it. Even if it is not legal, the company could still waste your time/efforts in court just to make your life difficult. So you might have to decide if it is truly worth it to you to be able to say something negative to any audience where it might get back to them.

They seem to meet the IRS leased employee definitions due to the first prong of the definition. So right now I would say they aren't eligible without changing that exclusion in your plan. Many employers want to exclude them and actually make the mistake going the other way. I will stay that "seems to me" with PEOs is not a good idea. You need to understand the agreement and they can be written in any number of ways. But in the end it seems like the employer still liable for any liability. (Sorry not a great big fan of PEOs personally) I would definitely find an attorney who is familiar with PEO/co-employment issues other than the PEO in-house counsel to read over the contract/agreement. eta: if it is only payroll/tax issues they are looking at (and not needing all benefits) a PEO might be overkill.

Back in the day when blackouts were much longer (no daily plans) and you almost always had to finish a quarterly valuation prior to transfer, payroll got the deferral elections and processed them regardless of the blackout and the new recordkeeper received the documentation of the deferrals and new entries and processed those as the last step of the blackout process. I think you still need to withhold and then deal with how the new platform is going to accept those people. I've never seen a blackout that (1) stops deferrals or (2) new entries. You could let those participants know their money will default to the default funds and they need to choose investments once the blackout is over since that is when the money will actually be deposited to their specific accounts. The new recordkeeper needs to deal with the fact that they will be receiving deferrals on accounts that need to be setup in the blackout period. And honestly these days of daily accounting, 21 day blackout seems long. I can hardly believe that this is even an issue and would be questioning why the new platform/recordkeeper doesn't already have a solution to this issue as it must have come up many many times in the past. Can someone not manually get them into the system during the blackout process? Or if the elections are made via an HRIS system, can't payroll/HR create a feed that can be posted right before the blackout lifts and the deferrals are processed? I am wondering if the issue is that is it so automated (and that automation flows through the recordkeeper back to payroll rather than the other way around) that payroll and HR have forgotten how to do it the "old" way? Harken back to the olden days and you just might find a solution!

Does the former employee also want to take any losses that might have occurred in the last 2 months? Earnings aren't always positive. And sometimes not being invested is actually helpful. I personally had this happen with a sizeable rollover. After all was said and done, we received a very small amount of Money Market type earnings from the basic fund. But honestly I was just glad to have my money OUT of that recordkeeper/employer.

Also you might check to see what state wage law is in terms of vacation pay. For example, CA vacation pay is earned without forfeit so it could not be considered severance. Many states though are employer's written policy and a few others have other weird complications. If the employer promises to pay out unused vacation time, I don't see where they could then reclassify it as a severance. They could however amend the plan to not pay any PS on any vacation pay as long as that meets a nondiscriminatory definition of compensation and would affect all employees. So I agree with QDROPhile that it could shed some light.

I'd say someone who is only working to save for retirement and has other income to use to live on. Usually a spouse who might have the other one who makes plenty and just wants to work for something to do. It happens. I would defer more if I weren't paying for 2 in college and one future to college!

I know on other laws such as FMLA, there is a lookback year and then the new status applies. Not saying this definitely for ERISA though. I do know that at some point if you file 5500's and stop filing without sending in a "final" 5500 or on quarterly 941 FIT/FICA forms to the IRS and you just stop filing that they will eventually come and ask you what happened to the missing ones. So you might try to see if you can mark anything on the last one that shows it is the last (at least for a while). It might save you some later heartache.

Any one can send someone to collections for just about any reason if money is owed. Often times the collection agency will require proof of the debt if you ask for it which is probably why HR is going to send you the evidence now. It would be the same evidence a collections company would ask for. There is nothing the collection company can do if you choose not to pay the debt except to keep hounding you and putting it on your credit report. Different uses of the credit report can matter (car insurance checks it in the calculation of your rates, car loans and home mortgage interest rates can depend on your credit, some potential employers may check it depending on the job position, etc) That is the big stick that they hold -- how it can affect your future credit. To get a garnishment on wages though, the employer would have to go to court and get a judgment against you. And it is possible in that case that they wouldn't win the case due to reason,timing, etc. The court may decide it is a mistake the employer has to eat. (that's assuming CA allows for garnishments for reasons such as this -- I work in a state that protects employees from most garnishments -- just child support, back taxes and student loans) Will they do either? you can never know until it happens. It could just be a threat. But under my personal belief system, if they could prove their mistake and I indeed owed them and they were willing to work out some type of payoff schedule, I would do my best to do so. I know it is hard when you are in school and on student loans but I would hope since it was their mistake that they would be willing to work with you.

Have you weighed the cost of the fix vs allowing it to stand and just amending the document for this time period? How many participants does it affect and what is the total cost? Honestly I would consider amending the document for this year alone and then correcting it on an go-forward basis. Otherwise, you have a heck of an administrative/communication problem and you have to consider how you will deal with those that have already had that match distributed to them. And as always, probably because I wear both hats at our companies, how did you get 10 months in before anyone in HR/Benefits noticed that Payroll hadn't been updated? Does no one check deductions/match on a pay period/monthly or even quarterly basis? Why not? I think you can blame payroll for the original mistake but then some responsibility needs to fall back to the HR/Benefits group, Finance/Accounting and possibly the recordkeeper if no audits are done on data being posted. Do none of them participate and see the match either on their paystubs, their online 401k accounts or quarterly statements, etc?