Monthly instead of per pay period withholding?

[mgcpension]

Employer has semi-monthly payroll but pays monthly commission to many employees, thus they would like to only withhold the 401(k) deferral once a month when the monthly commission is paid. Is that acceptable if the deferral election form states that the deferral will be withheld only on one pay check per month?

[chc93]

We have that situation. Semi-monthly payroll, with salary deferrals and loan payments only on the 15th of the month paycheck. If I recall correctly, the only "downside" is payroll administration, since every other paycheck is different. "Upside" for me is there is never a receivable at Dec 31 to worry about.

[Kevin C]

It sounds like a payroll nightmare to me. I think you would have some plan issues to consider, too.

You would need to determine if there are issues with benefits, rights and features. If the exclusion favors HCE's I think you would have problems.

1.401(k)-1(a)(4)(iv) (B)Testing benefits, rights and features.—

A plan that includes a qualified cash or deferred arrangement must satisfy the requirements of section 401(a)(4) with respect to benefits, rights and features in addition to the requirements regarding amounts described in paragraph (a)(4)(iv)(A) of this section. For example, the right to make each level of elective contributions under a cash or deferred arrangement and the right to make designated Roth contributions are rights or features subject to the requirements of section 401(a)(4). See §1.401(a)(4)-4(e)(3)(i) and (iii)(D). Thus, for example, if all employees are eligible to make a stated level of elective contributions under a cash or deferred arrangement, but that level of contributions can only be made from compensation in excess of a stated amount, such as the Social Security taxable wage base, the arrangement will generally favor HCEs with respect to the availability of elective contributions and thus will generally not satisfy the requirements of section 401(a)(4).

You will also want to make sure that prohibiting deferrals from a significant portion of pay doesn't cause a problem with universal availability of catch-ups under 1.414(v)-1(e) because it prevents someone from being able to make the maximum available catch-up. I'm thinking of someone who makes say $35,000 for the year, but only $17,500 of his compensation is eligible for deferral. I see that as an employer-provided limit that prevents him from having the effective opportunity to make catch-ups, unless there is an exception for catch-up eligible participants.

Discrimination testing could get interesting. I don't see any way that compensation for every other payroll would be a 414(s) compliant compensation definition. In particular, I don't see it meeting the requirement that the definition be reasonable under 1.414(s)-1(d)(2). So, testing would have to be done using a different definition of compensation.

[EBDI]

I also have a plan sponsor that wants to restrict participant deferrals to the last payroll of the month. Their plan is a safe harbor non elective. Would this cause problems with a safe harbor plan? It is a small group of 5 employees (3 HCE's) and all are okay with deferring from one payroll a month instead of 2.

[Guest A_Dude]

I think this is an area where the DOL is kind of overly aggressive. We all get the idea of late deferrals. Why not ask the a DOL agent if they would have issue if the employees all signed statements saying they agree to once a month deferrals (but payroll processed more frequently) based on the entire periods pay, but not to exceed the pay of the period deferrals are deducted from pay? And, document that it will be a burden for the employer to process deferrals more frequently. If you document it and say you will give all employees the option to have it done more per pay period should they request it; and I think you rely at least to some degree on "word" from an agent. Give them a hypothetical...

Then again...after all that, it may just be easier to say change the payroll frequency or you just have to do it per pay period.

[GMK]

FWIW, this feels like it's not getting the deferral money (from the mid-month pay) segregated from company funds timely, and the only benefactor is the plan sponsor.

There are some things an employee is not allowed to waive, and I suspect that timely deferrals is one of them, but I don't know that for sure.

[K2retire]

FWIW, this feels like it's not getting the deferral money (from the mid-month pay) segregated from company funds timely, and the only benefactor is the plan sponsor.

There are some things an employee is not allowed to waive, and I suspect that timely deferrals is one of them, but I don't know that for sure.

I read it to mean they would only withhold from the end of the month payroll.

[QDROphile]

I don't advocate for the proposal for deferrals only once a month when payroll is not monthly, but it is not uncommon to pay plan loans at only one of the pay dates in a month. But the applicable statute requires payments not less often than quarterly, so there is support for loan payment arrangements that do not exactly overlap pay dates.

[EBDI]

Thanks for the input. Excellent suggestion to make sure the participants sign acknowledging that they have the option for twice a month deferrals, but they are okay with once a month deferrals. Also explaining the burden to the employer to do it twice a month.

[masteff]

Sorry but what burden to the employer could possibly exist for doing deferrals on every paycheck in the technological age of the 21st Century? If you can manage to withhold payroll taxes correctly then you can withhold a deferral. And only very small employers can remit federal withholding by check, so if you're sophisticated enough to make electronic payroll tax payments, you can handle process a deferral.

The problem seems to be the notion that due to monthly commissions, one paycheck is significantly larger than the other. Possibly to the point that some people have little to no net pay on the small check. In which case, the employer needs to establish a heirarchy for deductions. Tax withholding and garnishments should come first, after that it gets a bit subjective. Simply put the most necessary deductions, like medical, in front of the "nice to have" deductions, like vision and 401(k).

Unless this is a pure sales company, then you're like to have one or two employees (e.g., the receptionist) who don't receive commissions who are then harmed by not getting the full deferral opportunity.

Personally, I would move to separate elections for each 1/2 month (depending on the plan's exact language) rather than skipping a pay period. Assuming they're using software rather than manually calculating payroll, most payroll systems allow you to program which paycheck of the month a deduction is taken from. Some employees could elect zero on the small check while allowing others to still defer. Unless the person doing payroll is incompetent, it would add just a minute or two of extra work to properly enter someone's election change.

[Peter Gulia]

Has the employer considered monthly payroll?