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24 v 26 pay periods


Good401(k)

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Client has 26 pay periods per year, resulting in two months (Mar & Aug) having three pay dates.  The clients payroll system is unable to process voluntary benefits, including 401(k) deferrals on a 26 pay period basis (not sure why, just what I've been told).  As such, although there are 26 pay periods per year, deferrals for the retirement plan are pulled from only 24.  This fact has been widely communicated and is standard knowledge to employees.

Question: has anyone seen anything in the code that would prohibit this arrangement?  I'm slightly concerned for those employees who elect a % deferral, as their total deferrals for the year will be slightly less than the % they've selected due to the two additional pay periods not receiving any deferral withholding.

Thanks in advance for the assistance.

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11 minutes ago, Good401(k) said:

I'm slightly concerned for those employees who elect a % deferral, as their total deferrals for the year will be slightly less than the % they've selected due to the two additional pay periods not receiving any deferral withholding.

I agree with your concern.  The sponsor has failed to implement a deferral election.  Having an  inadequate payroll system does not excuse the sponsor from its responsibilities.  Corrections are needed both for the missed deferrals and associated match contributions.

 

 

 

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2 hours ago, Good401(k) said:

Client has 26 pay periods per year, resulting in two months (Mar & Aug) having three pay dates.  The clients payroll system is unable to process voluntary benefits, including 401(k) deferrals on a 26 pay period basis (not sure why, just what I've been told).  As such, although there are 26 pay periods per year, deferrals for the retirement plan are pulled from only 24.  This fact has been widely communicated and is standard knowledge to employees.

Question: has anyone seen anything in the code that would prohibit this arrangement?  I'm slightly concerned for those employees who elect a % deferral, as their total deferrals for the year will be slightly less than the % they've selected due to the two additional pay periods not receiving any deferral withholding.

Thanks in advance for the assistance.

I frankly don't believe what you are being told.  No payroll system would have a crippled ability to process bi-weekly deductions vs. semi-monthly deductions.  Someone doesn't know what they are doing.  And, after asking someone to prove it to me and if they do, the answer is simple. The client needs to get a payroll system that does what a payroll system is supposed to do. This answer is NOT justifiable.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I work at a place that does something similar.  Sort of.  We are bi-weekly paid, but some of our benefits are paid 24 times a year, like insurance......  401k is done on bi-weekly schedule.  They try to make the 3rd pay a month special or something......  I think they tried to do the 401k on the 24 times a year..... they got told no.

I don't get it.

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I think we have a client that uses the same payroll system.  While I agree it's a lousy way to do things and they both need a new payroll system (or better training), that's not something we can force them to do.  If they are going to only apply 401(k) deferrals to 24 out of the 26 paychecks, the plan document needs to reflect that.  In our client's case we ended up having to amend the plan to exclude amounts received as the third paycheck in a month from the definition of compensation for deferral purposes. 

Are there any payroll systems that really do what they are supposed to do?  We are seeing a lot of problems with the 402(g) limit not being tracked correctly when there are catch-ups and/or Roth.

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9 minutes ago, Kevin C said:

Are there any payroll systems that really do what they are supposed to do?  We are seeing a lot of problems with the 402(g) limit not being tracked correctly when there are catch-ups and/or Roth

Yes, there are payroll systems that will do what you would like.  I think the issue is whether or not the people (HR, or payroll processer) coding the payroll system is doing what they are supposed to be doing.

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1 hour ago, Kevin C said:

I think we have a client that uses the same payroll system.  While I agree it's a lousy way to do things and they both need a new payroll system (or better training), that's not something we can force them to do.  If they are going to only apply 401(k) deferrals to 24 out of the 26 paychecks, the plan document needs to reflect that.  In our client's case we ended up having to amend the plan to exclude amounts received as the third paycheck in a month from the definition of compensation for deferral purposes. 

Are there any payroll systems that really do what they are supposed to do?  We are seeing a lot of problems with the 402(g) limit not being tracked correctly when there are catch-ups and/or Roth.

Absolutely there are such systems.  We have a very large payroll operation (that is also our client) and we have worked with them for years to make sure their system does everything it should, including the tracking of max deferral limits based on the date of birth keying the catch up increase allowance.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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2 hours ago, Bri said:

Nobody's going for the "change the definition of compensation for 401(k) purposes to exclude paycheck three in a month" argument?  :)

Inclusion ratio and all!

Thank you all for the response.  Agree with Bri - any additional thoughts on this methodology? Larry?
 

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Also, take note of the eventual timing that leads to 27 paychecks in one calendar year.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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20 hours ago, Bri said:

Nobody's going for the "change the definition of compensation for 401(k) purposes to exclude paycheck three in a month" argument?  :)
 

 

21 hours ago, Kevin C said:

...we ended up having to amend the plan to exclude amounts received as the third paycheck in a month from the definition of compensation for deferral purposes. 

wasn't that what Kevin said? ?

 

 

 

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I told the CPA of the one company I work on with a bi-weekly payroll that I couldn't reconcile anything against the W-2s.  I suggested the company change to semi-monthly and she agreed it would make her work much easier as well,  Client didn't have an issue with changing.  Just hasn't done it,  Sure is a PITA for all involved.

 

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17 minutes ago, imchipbrown said:

I told the CPA of the one company I work on with a bi-weekly payroll that I couldn't reconcile anything against the W-2s.  I suggested the company change to semi-monthly and she agreed it would make her work much easier as well,  Client didn't have an issue with changing.  Just hasn't done it,  Sure is a PITA for all involved.

 

For those that read later looking for help.....

It's not uncommon when reconciling weekly and bi-weekly payrolls to need the last payroll of the previous year, the last payroll of the year current year testing, and sometimes the first payroll of the newest year.  Depending on what the employer/payroll provider is giving for payroll data, you have to drop a payroll and add a payroll to balance to w-2.  If that doesn't solve your problem.. well, you know, get an individual's complete payroll dates and amounts, and start reconciling again.

Sometimes the payroll end date gets set up as the paydate.  Therefore the w-2s don't match.  We try to get the paydate setup as the dates in relius.  Seems to help the balancing immensely.

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The definition of Compensation in the plan document would be the deciding factor.  Also, if omitting any type of irregular compensation, it's important to note that a 414(s) definition still must be used for ADP/ACP, and a compensation ratio test may be needed for other employer contributions.  3rd payrolls in each of 2 months per year is a revolving period, so I'd be concerned about any bonuses or special payments at quarter end or yearend that may impact rank & file employees more than HCE's.

ERPA

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