Contributions deposited prior to payroll

[RT]

Client accidentally deposited payroll contributions twice for the same effective date. Instead of reversing second transaction, can employer leave the funds deposited alone, and change the effective date of the second deposit to match with the next pay date? The funds would have been deposited before they were withheld from participants' paychecks, but isn't the risk entirely on the employer? There is no harm to participants - in fact, they benefit. 

[QDROphile]

Are you not worried about the risk to the employer, such as disqualification?  Disqualification would not serve the participants very well, either.

[Mike Preston]

These sorts of errors happen all the time with 401(k) plans. Unless there is some funny business with respect to moving deductible amounts between fiscal years the IRS will allow just about anything that seems remotely reasonable as a self-correction.  I dare say that every 401(k) plan in the country would be disqualified if the IRS were sticklers on the "don't contribute deferrals before the actuall payroll date" rules.

[QDROphile]

"IRS will allow just about anything"

Does that include doing nothing other than not truly doubling the contributions, as suggested by the post (although I don't really understand what "change the effective date" of the deposit means)?

[Mike Preston]

Well, I did say as a self correction, not purely ignoring any problems. If the only thing going on is that the employer deposited salary deferrals for two pay periods at the end of the firist pay period, and the employee worked through the end of the second pay period (and thus earned into the deferrals) I just don't see much of an issue.

[QDROphile]

Assuming that all the deferral amounts for the next pay period are identical to the excess amounts mistakenly deposited, that leaves investment earnings to evaluate.  Chances are that the interim earnings are immaterial and the "do nothing" approach (other than documenting the error and the consideration of correction) could be reasonable.  A participant with even an immaterial amount of negative earnings might complain, but that is another question for another time. Keep in mind that one of the primary principles of correction is that the plan be put in the same position as if the error had not occurred, so some serious attention and thinking should be applied to the interim earnings.  The IRS has no express "de minimus" standard for these circumstances.