Payroll Error led to over and under employee Contributions in 2008

[Alex Daisy]

A Plan erronously deposited 401(k) employee deferrals into a few particicpants accounts and shorted other participants.

The over contributions will be removed from the affected participants accounts with earnings, but what is the correct way to handle the participants who were shorted?

[Guest Form5500]

The Department of Labor (DOL) requires employers to transfer participant contributions by:

• The earliest date such amounts can reasonably be segregated from the employer's general assets,

• But in no event later than 15 business days after the month in which the contributions were withheld or received by the employer.

Based on the information you provided, it appears that these employee deferrals/contributions will be considered late according to the DOL timing and this will be considered an operational plan error. You will need to correct the late deferrals/contributions by making up the lost earnings.

The DOL’s Employee Benefit Security Administration (EBSA) sponsors the Voluntary Fiduciary Correction program (VFCP). It’s designed to encourage self-correction of certain violations of ERISA (late deferrals/contributions being one of them). You will need to fully correct the late deferrals/contributions, calculate any lost earnings and restore those losses with interest or profits. The DOL has an on-line calculator you can use to do this and it’s relatively easy.

You can correct and not go through the VCFP, but then if you are later audited the EBSA may not consider the rate or methodology you use acceptable.

Depending on how many participants you have and how many times you are late, it is relatively an easy correction. Just make sure you document everything, follow the checklist and allocate the lost earnings by the final payment date you choose for the correction.

Good luck and let me know if you need any more help.

[BG5150]

I thouhgt those DOL rules applied to depositing the contributions to the trust, not necessarily the participant's accounts. They were put in place to keep the ER from sitting on, and perhaps using for other purposes, the deferrals.

I'm assuming all the money made it into the trust, but got put into the wrong accounts. Are the W2's correct for the shorted people?

I would take out the money from the over-paid accounts with earnings (as you said). And I would pay into the shorted accounts the proper amount adjusted for earnings, if you can figure that out. If the contribution with earnings is more than what was taken out of the over-paid accounts, then the Employer will make up the difference (maybe recouping it from the payroll company or record-keeper if it was their fault).