Insufficient Funds for Deferral Amount

[Guest blackacre]

A company pays its employees in two phases for each month. The first check is on the 5th of the month and is in the nature of an advance, a set amount each pay period based on a minimum number of trips for which the employee will be paid, taxes are withheld from this amount.

The second check is paid on the 20th of the following month and is a reconciliation of the advance amount with trips actually made. It is from this check that the salary deferral amount for the 401(k) plan and other amounts, such as the employee's share of insurance premiums, are deducted.

The issue is what should happen when, for unexpected reasons, the amount available in this check, after taxes are withheld, is insufficient to cover the 401(k) deferral amount.

Is the risk of such an event solely on the employee? Is there any obligation on the employer to assure that the 401(k) deferral is taken out? For example, should the employer front the deferral amount and then deduct that amount from the next advance check?

I welcome your thoughts. Thanks.

[WDIK]

I guess I would question why no amount is deferred from the checks made on the 5th of the month. Even if you argue that it is not required, wouldn't it help alleviate the problems faced on "reconciliation" check?

[Guest jhilliard]

I would tend to agree with WDIC, can't or shouldn't a percentage of the deferral be taken from the first check? I would think the employer would want to have this arrangement to eliminate this scenario.

[mbozek]

If the payment on the 5th is in the nature of an advance to the employee for work which has not been performed it is not wages for tax purposes and is not includible in income if the employee returns a portion to the employer in the same year it is advanced. See Rev. Rul. 79-311. If the employee's compensation after adjustment is less than the amount to be withheld from the 401(k) amt then the Plan admin can only deposit the amount available after tax withholding to the 401(k) plan. Its no different then if the employee has to pay other obligations such as child support or alimony which result in insufficient funds available to contribute to the 401(k) plan.

[WDIK]

mbozek:

Your point is well taken. However, couldn't the employer just "advance" less based on the knowledge of the upcoming salary deferral amount to avoid the scenario described?

[E as in ERISA]

I also think that it would be good practice for the estimated paycheck on the 5th to include deductions for the estimated 401(k), health insurance premiums, etc. I have seen that done before.