Incorrect Elective Deferral

[AAS2]

An ER incorrectly contributes to a 401(k) plan an amount that is in excess of the amount that the EE elected. This happens once, and the correct amount is withheld and contributed in the next payroll period.  The error appears to have been made when the first deferral election on file was not cancelled after a second deferral election was made.

What is the best way to make the correction?  Should the amount be returned to the EE from the plan (as compensation)?  I can find nothing in EPCRS that addresses this situation.  There is no excess deferral, just a one-time human (or perhaps computer) error.

 

 

[austin3515]

I'm sorry, but can you clarify one thing - I assume that the only amounts deposited to the Plan were amounts that were withheld from the individuals paycheck?  It's just that in the first pay-period, they withheld (and deposited) more than he/she had elected?

[RatherBeGolfing]

What was the timeline between the EE submitting the second deferral election and the "excess" deferral? How much extra was deferred?

 

[AAS2]

Thank you for your responses.  Austin, yes, the only amount deposited came from one participant's paycheck.  RatherBeGolfing, not sure how the mess up occurred but it was almost as though the two deferrals passed each other in the mail.  There was a small percentage change.  Not sure about the numbers, but the EE changed the election so that the sum of the two elections came out. Example, the EE changed the election from 5 to 7 and 12 was taken out.  The deferral percentage was way below the deferral percentage that the plan permits.  This happened for one pay period only.  

Thank you for your additional thoughts.

[austin3515]

If the employee doesn't care I would personally let it ride.  If they are upset, you should be able to reverse on payroll (negative 401k deduction) to get him his money back, and the recordkeeper should be willing to refund the plan sponsor based on a mistake of fact.

Certainly easy enough to fix.

[RatherBeGolfing]

1 minute ago, austin3515 said:

If the employee doesn't care I would personally let it ride.  If they are upset, you should be able to reverse on payroll (negative 401k deduction) to get him his money back, and the recordkeeper should be willing to refund the plan sponsor based on a mistake of fact.

Certainly easy enough to fix.

I was going to say the same thing with a small addition.

if you can't reverse the payroll or the recordkeeper gives you a hard time, maybe the sponsor can give the participant a small extra paycheck so that the participant has the same "cash in hand".

[austin3515]

Well that will cost everyone payroll taxes too though, which have already been paid.

[RatherBeGolfing]

Thats true

[CuseFan]

So an extra 7% was withheld from one paycheck? I agree with the negative deferral approach, which gives the employee back the cash through paycheck and turns the current withholding from +5% to -2%. As noted above, that might create a problem for the RK. If so, then I would reduce the next deferral to 0% and the one after to 3% - or reduce by the actual excess dollars if paychecks aren't all the same. If the employee doesn't care about the excess withholding and everyone wants to let it ride, i would have the employee provide something to that effect in writing to the employer just in case.