Which comes first -(401k deferral) or (medical insurance deduct)

[Pammie57]

A 401k client has Paychex do their payroll.

Their plan document does not exclude bonuses or any irregular pay from withholding deferrals.

A participant got a small bonus check of about $30 - Paychex withheld his medical insurance premium first - and this resulted in a zero net check. (the premium is obviously more than $30)

Should they have withheld his deferral first and deducted the remainder for insurance premium? Is this something the employer can dictate? Paychex told them that was how their system did it. If the check has been large enough to deduct both - then that would have happened. Is there a pecking order by law?

Thoughts? Thanks!

[QDROphile]

Elective deferrals are governed by contract -- the plan document, and most plan document are really lousy contracts. The appropriate order is determined by thoughtful consideration, another failure. Finally, cheap inflexible payroll systems and providers, by contract, can interfere with thoughtful efforts to achieve a desired goal. Payroll systems and providers are the bane of plan administrators and designers.

Setting aside extraordinary compensation from the conversation, it makes sense to give priority to elected health coverage payments and nonelective health coverage payments will certainly get priority. But the payroll provider should not be the one to decide in an ideal world. And not matter what, the plan document should address sources of contributions as a separate matter from definition of compensation. Try to find a prototype provider that does.

[Lou S.]

As they are "elective deferrals" I would assume they have a very low priority on the order in which they come out of person's paycheck. I have no legal basis for this conclusion but in practice it is the way I have seen them handled by nearly every payroll system I've come in contact with.

[Peter Gulia]

QDROphile is right that this kind of problem can be managed with clear documents.

But a carefully stated retirement plan isn't enough. If the problem is - beyond tax withholdings, levies, and garnishments - two or more opportunities for wage reductions or deductions, the employer should consider all of its employee-benefit plans, fringe benefits, and other arrangements that have a possibility of a wage reduction or deduction.

Imagine an employer that has payroll slots for health coverage, health flexible spending account, dependent care spending account, disability insurance, life insurance, transportation fringe, 401(k) elective deferrals, and a stock-purchase plan.

It might be feasible to ask an enrolling employee for instructions on what to do when there isn't enough pay to fill all wage reductions and deductions. Or an employer might design a series of ordering rules. But to do either calls for someone to see all of the plans and arrangements.

How many of us get an employer's request to work on more than one plan?

[TPAJake]

My wife is a payroll director on a multi-state payroll & this is a continual source of questions, especially when there are garnishments involved.