Employer failed to withhold 401k pre and after tax contribution

[vickystamford]

Hi,

My situation is a little complicated and really appreciate your help -

I have been contributing 13% pre tax and 50% after tax to my 401k for a while. Suddenly, my employer failed to withhold my 401k pre and after tax amount on 9/7 payday. Also I lost 6% pre tax employer match. I let my HR know 9/7 immediately; they admitted that it was their error but are still working on the solution.

The next payday is 9/21. The pay statement showed up in ADP account 9/19. They withheld 13% pre tax but did not withhold 50% after tax.

I am pretty sure that I haven't reached any IRS annual limit for 401k contribution this year.

I have questions as below -

Because of the high contribution %, especially after tax contribution, it will be hard for employer to withhold more in my future paycheck this year to correct the errors. What can they do?

Is there any IRS regulation about employer failing to withhold after tax 401k contribution?

Thank you.

 

[My 2 cents]

Failure to properly administer the 401(k) plan would appear to be more of a DOL matter.

[ratherbereading]

 The problem can be rectified by making a qualified nonelective contribution (QNEC) to the plan on your behalf, and as in the case of other operational problems, the error can be fixed through the Employee Plans Compliance Resolution System (EPCRS). Is the plan administered by a Third Party Administrator?  They can step in and help. I've done this for my clients who have neglected to withhold and contribute participants' 401k deferrals.

https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-correcting-a-failure-to-effect-employee-deferral-elections

[401_noob]

In addition to what Karonline provided above, here is the IRS' new method for correcting deferral errors.

https://www.irs.gov/retirement-plans/new-methods-for-correcting-elective-deferral-errors

Under the new method the Employer may or may not have to make the QNEC depending on how quickly they re-implement your pre-tax elections & provide you the notice described in Appendix A of Rev Proc 2015-28, but you should still get a matching contribution equal to the match that would have been received had your pre-tax deferral been withheld.

[vickystamford]

Thank you all for the reply.

What about after-tax 401k contribution? Am I simply "missing" the 2 opportunities for after tax contribution?

[401_noob]

Karonline's response regarding the QNEC is the corrective contribution for failing to implement your After-Tax contribution. I want to say that the QNEC is 40% opposed to 50% though. 

I don't think that After-Tax failures were included in the new methods for correcting deferral errors that I included above. 

[Belgarath]

Agree. That correction is for elective deferrals. Under 1.402(g)-(b), elective deferrals are amounts contributed to the plan at the employee's election, and except to the extent that they are Roth contributions, are pre-tax. Since the voluntary after-tax contribution doesn't fall under this definition, then I'd say the "new" correction (no QNEC) doesn't apply.

As an aside, since these are after-tax contributions, and you have already received the money in your paycheck on an after-tax basis, and it is only a couple of payrolls where this happened, how much are you really "missing?" You are getting your full match, presumably, when your employer fixes the pre-tax. Since you have the funds in hand, why can't you increase your contribution for the rest of the year, and "make it up" by using the cash you have already received?

I'm just trying to get my head around how much, (if anything) you are realistically losing - and why you can't make it up out of the pay you received already. I'm not seeing this as any sort of a big issue.

[Belgarath]

p.s. as 401noob suggests above, the correction in Appendix A.05(5)(b) for missing after-tax contributions is 40% of the "missed" contributions. Personally, I think this is crap, as it gives the employee an undeserved windfall, which is one of the things the changed Revenue Procedure was supposed to prevent. If an employer self-corrected using the "new" procedure (no QNEC) I wonder if an auditor would object? Or, if you submitted it through VCP, if the amounts were high enough to be worth it, if the IRS would approve the filing? I can't answer those questions, as I've never had any direct experience with this situation. Any thoughts out there?

[vickystamford]

18 minutes ago, Belgarath said:

Agree. That correction is for elective deferrals. Under 1.402(g)-(b), elective deferrals are amounts contributed to the plan at the employee's election, and except to the extent that they are Roth contributions, are pre-tax. Since the voluntary after-tax contribution doesn't fall under this definition, then I'd say the "new" correction (no QNEC) doesn't apply.

As an aside, since these are after-tax contributions, and you have already received the money in your paycheck on an after-tax basis, and it is only a couple of payrolls where this happened, how much are you really "missing?" You are getting your full match, presumably, when your employer fixes the pre-tax. Since you have the funds in hand, why can't you increase your contribution for the rest of the year, and "make it up" by using the cash you have already received?

I'm just trying to get my head around how much, (if anything) you are realistically losing - and why you can't make it up out of the pay you received already. I'm not seeing this as any sort of a big issue.

Yes, I agree with you. When this happened, my first reaction to make up my after tax contribution was "I could write a check to my company and then they deposit to my 401k account on behalf of me". I am not a Benefit expert and knew nothing about all IRS regulations.

I am contributing 13% pre tax and 50% after tax to 401k, plus tax withholding, Medical and Dental etc. Really not much left in my each pay check (a few hundred dollars). The highest percentage allowed for after tax 401k contribution in my company is 50%. In July I just learnt the benefits of after tax contribution therefore I would like to catch up for the rest of this year. If my employer allows after tax contribution higher than 50%, I don't mind taking even less home in my paycheck.

 

[Belgarath]

First, are you doing an "in-plan" Roth rollover of your after-tax contributions? If not, I don't see that it is necessarily such a big benefit, particularly for just two payrolls.

I can't speak for your employer, but if correcting an error, I think there is latitude to temporarily exceed the 50%, until the error is corrected. But that's up to them. One of the principles of self-correction is to put the plan and participant in the same situation they "would have been" absent the error. As long as no IRS limits are being exceeded, shouldn't be a problem IMHO.

How much, in actual dollars, was "missed?" And I don't know how much you are contributing, but although the deferral limitation doesn't apply, the IRC 415 maximum does - presumably your employer is tracking this.

Good luck.

[K2retire]

19 hours ago, vickystamford said:

I am contributing 13% pre tax and 50% after tax to 401k, plus tax withholding, Medical and Dental etc.

 

Are you truly contributing after tax -- or is it Roth? In the retirement plan world they are not the same thing.

[david rigby]

On ‎9‎/‎19‎/‎2017 at 10:33 PM, vickystamford said:

I am pretty sure that I haven't reached any IRS annual limit for 401k contribution this year.

Rather than "pretty sure", perhaps it would be prudent to verify this first.  Many payroll systems include thresholds that limit deductions, as a method to avoid over-withholding.  (Whether they work properly is another matter, but such system limits could be part of the problem.)

[vickystamford]

Update:

3 weeks after messing up my 2 paychecks, my company deposited the missing employer match as QNEC in my 401k account. At first the Benefits Team sent me an email template about missing pre tax contribution but nothing about after tax contribution. So I had to follow up with them again. I guess only a tiny portion of people make after tax contribution and the Benefits are not familiar with it at all. Then they sent me another template, basically saying "Oops we messed up but too bad. We are sorry but nothing we can do. We will NOT lift 50% after tax contribution limit and you CANNOT make up these 2 missed after tax contributions. You can increase your pre tax % or contribute to roth 401k." Excuse me?! Pre tax or Roth 401k are different animals, ok?!

To answer your questions -

Yes, I am contributing to after tax 401k (not Roth 401k) and doing in-plan conversion to my Roth IRA.

And yes, instead of "pretty sure", I am 200% sure that I am nowhere near any IRS limit (pre tax $18000, pre tax + roth + after tax + employer match $54000). My contributions have been working for several pay cycles but suddenly something went wrong...

One more question -

Should I say "ok. thank you." to my Benefits Team and let it go? Or send IRS link to them and say "Not done yet. You guys owe me 40%"?

Thank you!

 

[Belgarath]

No one can answer that question for you. But consider this: You aren't out one single penny. You got paid the after tax contribution, that would otherwise have gone to the plan, in your paycheck. Do you really want to risk the potential ire (and retaliation - officially they cannot retaliate for this, but there are ways!) to be greedy and get some "free" money to which you aren't really entitled by most common sense standards?

If I were in your shoes (and I'm not, so my advice is at best uninformed, and most likely useless) I'd lighten up and drop it at this point. And don't forget - the argument can be made (although I don't think the argument is necessarily valid, as I stated earlier) that under the Revenue Procedure, no correction is due.

Good luck.

[Tom Poje]

if I understand things correctly, an after tax contribution was missed due to an error (mistakes happen and of course both sides need to deal with it and handle things as best as can be done without hurting feelings , etc) and sometimes even those best efforts unintentionally  fall short for one reason or another.

 

under EPCRS (self correction program)

Appendix B Section 2 .02(1) F

(F) Special Rule for Brief Exclusion from Elective Deferrals and After-Tax Employee Contributions. An Plan Sponsor is not required to make a corrective contribution with respect to elective deferrals (including designated Roth contributions) or after-tax employee contributions, as provided in sections 2.02(1)(a)(ii)(B) and (C), but is required to make a corrective contribution with respect to any matching contributions, as provided in section 2.02(1)(a)(ii)(D), for an employee for a plan year if the employee has been provided the opportunity to make elective deferrals or after-tax employee contributions under the plan for a period of at least the last 9 months in that plan year and during that period the employee had the opportunity to make elective deferrals or after-tax employee contributions in an amount not less than the maximum amount that would have been permitted if no failure had occurred.

 

...................

example 4 (this is if correction is by QNEC correction not brief exclusion)

(3) Corrective contribution for missed after-tax employee contribution: Employee X was eligible to, but was not provided with the opportunity to elect and make after-tax employee contributions from January 1 through August 31 of 2006. Employer C must make a QNEC to the plan on behalf of Employee X equal to the missed opportunity to make after-tax employee contributions. The missed opportunity to make after-tax employee contributions is equal to 40% of Employee X’s missed after-tax employee contributions. The QNEC is adjusted for Earnings. The missed after-tax employee contribution amount is equal to the 0.5% ACP attributable to employee contributions for nonhighly compensated employees multiplied by $24,000 (8/12ths of the employee’s 2006 plan compensation of $36,000). Accordingly, the missed after-tax employee contribution amount is $120. The missed after-tax employee contribution is not reduced because the sum of $120 and the previously made after-tax employee contribution of $250 is less than the overall plan limit of $1,000. Therefore, the required QNEC is $48 (that is, 40% multiplied by the missed after-tax employee contribution of $120). The QNEC is adjusted for Earnings

................

As indicated, the applicable correction can not exceed any plan limit. in the example above the plan limit is $1000. in your case the plan limit is 50%. they are saying they can't increase your after tax for the rest of the year because you are already at 50%, the plan limit. so the question becomes is the 50% per pay period or 50% for the whole year. if it is 50% for the whole year then you should be able to increase.

for example, if your after tax was at 45%, each pay period you could have increased to 50% and under the brief exclusion rule you could have obtained the maximum amount had the error not occurred.

But if you are not permitted to increase your after tax, the brief exclusion rule fall apart. so if they make a 40% QNEC for missed after tax the total over the whole year of your after tax + corrective QNEC would not exceed 50% and so no plan limit was violated.

..

but then I have been known to ramble on and on....and hopefully I didn't miss anything.

 

 

[K2retire]

18 hours ago, vickystamford said:

 

And yes, instead of "pretty sure", I am 200% sure that I am nowhere near any IRS limit (pre tax $18000, pre tax + roth + after tax + employer match $54000).

 

Actually it's pre-tax + Roth limited to $18,000.