Election to defer 100% leaves no money for medical deductions

[ERISA-Bubs]

We have a few executives that want to max out their 401(k)'s as early as possible in 2017. This basically means they will be deferring 100% of their first 2 or 3 paychecks.

The problem is, under our system 401(k) contributions are deducted first, and then we deduct for other things, such as health plan premiums. So once we take 100% of their paychecks to cover their 401(k) contribution, there is nothing left to fund the other deductions.

Is there an easy way around this?

[Mike Preston]

Patient: Doctor, it hurts when I do that.

Doctor: Don't do that.

Seriously?

Either this is intentional (which I doubt) and the participants previously received notification that a deferral election can serve to sever payroll deductions for other benefits and that in such case they would have to make other arrangements to avoid interruption of those other benefits or it is unintentional, in which case the plan sponsor should look to the controlling plan documents to see if there isn't some way to justify them changing the order of withholding, which I can't believe they can't find.

If need be, amend the plan.

But I find it hard to believe that will be necessary. Here is some language I found in a volume submitter plan:

The rules and procedures for allowing Participants to defer and reduce their Compensation under

Paragraph xxxx of Article I and this Paragraph xxxx and to decrease (or increase) such reductions and deferrals shall be established by the Committee, in its sole discretion; provided, however, that the Committee shall exercise its discretion in a uniform and nondiscriminatory manner. "

If your plan has something similar it should allow the Committee to establish a rule that says: the maximum deferral for any pay period shall be no more than net pay.

[hr for me]

This is one time where you need to have payroll review and change the order of deductions. Think about how you would handle a wage garnishment on one of these employees. By law, it has to come out in a certain order. I doubt any of the employees want to lose other benefits due to nonpayment so they can defer to the 401k.

And I agree with amending the plan if it truly says they can defer 100% of gross pay -- because even then you are going to have FICA issues.