payroll service messes up deferral calculation

[K2retire]

Plan sponsor uses a well known payroll service. Most participants have deferral elections for a percentage of pay. In 2010, the employees are asked to pay a portion of their dental insurance premiums that had been previously paid by the employer. Payroll service adjusts all participants' deferral percentage to be based on the pay after deducting the insurance premium rather than the gross pay. This is not noticed until 2011.

We now have about 100 participants whose actual deferrals are less than the percentage on their elections by a relatively small amount. What is the fix?

[BG5150]

I would think that it's up to the Employer to make the 50% (of missed deferrals) QNEC and full match (if one was made) and then go after the payroll company to recoup the costs.

Just a thought.

[Peter Gulia]

Leaving aside any question about what the payroll service did or failed to do ....

Before considering any potential correction, the plan's administrator and the employer (are those the same corporation?) might prefer to evaluate whether there was or remains an error.

For a participant who expressed his or her elective-deferral amount as x% of compensation, what (if anything) did the salary-reduction agreement say about what measure of compensation the x% is applied to? If the form said nothing on that point, should the salary-reduction agreement be read in context with the plan? Among the plan's several definitions of compensation, how does the plan define accrual compensation? And does the plan's provision for elective-deferral contributions (or limits on them) say anything about whether they're counted in relation to accrual compensation?

Even if the x% should have been measured on compensation before the contributions for health (includling dental) insurance, did the employer and an affected participant, by conduct, change the salary-reduction election? Although a plan, summary plan description, and sra form might describe a method for changing an elective-deferral election, did the documents restrict changes to only the method described? If not, did a participant - by his or her conduct of accepting more pay without complaint (and perhaps adopting plan account statements that reported the lower contributions) - adopt or ratify a change of his or her elective-deferral election? (That view might be stronger if there are several writings, including pay confirmations, that show the revised amounts.)

Although a State's wage-payment law (if not preempted by ERISA) might preclude a wage deduction that is more than what the employee authorized under the kind of writing required by the wage-payment law, the State law might not preclude a wage deduction that is less than what that writing authorized.

When a situation of this kind is discovered in January or February, some practitioners suggest that a plan's administrator and employer wait for the employee's reaction to his or her W-2. If there is a complaint, respond to it. If an employee does not complain, that might be some further evidence that he or she assented to the contributions that were made.

Of course, these are only practitioner-to-practitioner ideas (not advice), and each person should get the advice of his, her, or its lawer.

[GMK]

did the employer and an affected participant, by conduct, change the salary-reduction election?

Peter has outlined well what loopholes to look for, but most, if not all, plans define compensation pretty precisely, leaving no room for the employer and participant to modify it. Regardless of what side agreements the employer and participant make, you still have to run the plan according to the Plan Document.

In this case, I prefer BG5150's direct approach; make the correction. And I would first ask the payroll service why they shouldn't take responsibility for determining and funding the correction. (I doubt that a "well known" payroll service would be ignorant of their need to know the plan's definition of compensation for deferrals.)

[K2retire]

All suggestions make sense. The client, however, is very unhappy about the time involved with having to make corrections of less than $25 per participant.

[PensionPro]

Practically speaking, one of the principles outlined in RP 2008-50 for EPCRS is that if the amount involved is insignificant, and is smaller relative to the costs of processing and administration, the plan sponsor can disregard those corrections. For example, the plan sponsor is not required to make corrective distributions of $75 or less, or to seek recovery of overpayment of $100 or less. My approach would be to have the payroll service make adjustments (i.e. withhold the additional amounts) in 2011, communicate it to those affected, document the correction, and move on to bigger and better things.

[BG5150]

Practically speaking, one of the principles outlined in RP 2008-50 for EPCRS is that if the amount involved is insignificant, and is smaller relative to the costs of processing and administration, the plan sponsor can disregard those corrections. For example, the plan sponsor is not required to make corrective distributions of $75 or less, or to seek recovery of overpayment of $100 or less. My approach would be to have the payroll service make adjustments (i.e. withhold the additional amounts) in 2011, communicate it to those affected, document the correction, and move on to bigger and better things.

Whereas the amounts might not be significant, I think there is a significant error in that the mistake was made across 100 or so participants over multiple payrolls, if not the whole year.

[Kevin C]

Practically speaking, one of the principles outlined in RP 2008-50 for EPCRS is that if the amount involved is insignificant, and is smaller relative to the costs of processing and administration, the plan sponsor can disregard those corrections.

You are misquoting the Rev. Proc. The exception to full correction is for distribution of small correction amounts, not for the allocation of corrective amounts. If you would otherwise allocate a small amount to a terminated participant with no balance in the plan and the costs of making the distribution are more than the less than $75 correction, then you don't have to allocate a correction to that person. If the person being corrected already has a balance, the additional cost for distributing the correction would be negligible since they would be getting paid anyway.

Rev. Proc. 2008-50, Section 6.02(5)(b) Delivery of small benefits. If the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution. This section 6.02(5)(b) does not apply to corrective contributions.

[PensionPro]

Please read my post in the right context, there are no misquotes. I referred to a principle and used an example. Furthermore, my recommendation was to make the correction, not to disregard it. Let's not miss the forest for the trees.

[MARYMM]

All suggestions make sense. The client, however, is very unhappy about the time involved with having to make corrections of less than $25 per participant.

The payroll service should perform the calculations - although if I were the employer, I would spot-check them. They should also prepare a draft communication to the affected employees explaining what happened and how it will be fixed (the employer 50% QNEC and match method as outlined by BG5150). They have until their tax return for 2010 is filed to fund the contributions - which the payroll sevice should be paying part of, IMO.

While they are working on these items , I'd be looking for a new payroll service.