Employer missed 401k deductions in 2019

[newemployee401k]

Hi All - Looking forward to your expert opinion on my situation.

Situation

- I started working in May 2019. First job. Huge multinational firm. I elected to contribute 20% of my pre-tax income into my 401k to hit the ~19k max employee contribution limit. My employer matches upto 6% for the first 100k of my salary. 

- In Nov 2019, I noticed that 401k deductions hadn't happened properly at all in any payroll - meaning 20% was not taken from my paycheck (bi-weekly) and hence no deposit to 401k and I was paid my full base salary excl medical premium and HSA deductions. I escalated to HR, and they took 3 months to investigate and got back to me in Feb 2020 after constant follow up. Meanwhile 2019 tax year was over and I got my W2 with no 401k deductions.

Solution from HR

HR told me in Feb 2020 that

- The underlying root cause was identified. The mistake was not on my side

- They will provide the full 6% match into my 401k as if deductions had happened properly

- However they cannot deduct any 2019 employee contributions for me retrospectively. Instead they would pay me a penalty of 2% of my base pay as compensation (into my normal paycheck and not 401k) in 2020 which they said is "the standard IRS guidance" to fix the issue

- My 2020 deductions would happen as normal

My problem

I dont want the 2% fee to be paid to me (which will also be taxed). Instead I want them to fix the issue by deducting from my paycheck and depositing into my 401k what should have been done properly in 2019. I am willing to cover that from my 2020 salary (for both 2019 and 2020 deductions) or willing to transfer the amount back to the employer (I had given HR these options as well). Meanwhile I have filed a tax filing extension till Oct 2020 to get some runway to deal with this problem 

Advice needed

- Is my HR statement on the 2% penalty the standard IRS guidance? Or is there a way to get them to put in the proper amount into my 401k for 2019 contributions.

- If there are rules to get HR to do the right thing, any idea of the impact on my tax filing will be welcome. The company provides for me a tax attorny for the first year of filing and I will be discussing this with them anyway but any insight will be appreciated.

[ESOP Guy]

This forum is mostly industry professionals so you will get the best answers come Monday morning when they are back at work.

But here is the actual IRS guidance on correction and no it is not making a payment to you.

 

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-were-not-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees

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

 

I would wait until you get some responses Monday from the 401(k) experts before going to your HR department.  I haven't worked 401(k) plans for almost 9 years now.  The experts can give you more detailed answers. 

[newemployee401k]

Thank you very much.

I have also updated the post to clarify that no money was held from my paycheck and hence no contribution was made to my 401k - I got my entire base salary in 2019 minus the health insurance premiums and HSA contributions.

[JackS]

You are out of luck on 2019 - they are not going to "correct" that as you requested.  You may be entitled to a corrective plan contribution from the employer directly to your account - one of the links above describes that as a QNEC of 50% of what should have been withheld from your check adjusted for earnings.  That basically would amount to free money so it's hard to complain about that.  Without knowing all of the details of your plan (Auto Enroll Plans have some modified rules that could result in a smaller correction), I would reference the section quote above to your HR and request that correction and see where it goes.

Since you were willing to post up here, let me ask you a question that all of us in the pension comunity ask ourselves frequently.  How do you not notice that 20% of your income is not being withheld from your paycheck?  You never, not once, looked at a paycheck stub? 

 

[Larry Starr]

On 3/15/2020 at 1:43 AM, newemployee401k said:

Hi All - Looking forward to your expert opinion on my situation.

Situation

- I started working in May 2019. First job. Huge multinational firm. I elected to contribute 20% of my pre-tax income into my 401k to hit the ~19k max employee contribution limit. My employer matches upto 6% for the first 100k of my salary. 

- In Nov 2019, I noticed that 401k deductions hadn't happened properly at all in any payroll - meaning 20% was not taken from my paycheck (bi-weekly) and hence no deposit to 401k and I was paid my full base salary excl medical premium and HSA deductions. I escalated to HR, and they took 3 months to investigate and got back to me in Feb 2020 after constant follow up. Meanwhile 2019 tax year was over and I got my W2 with no 401k deductions.

Solution from HR

HR told me in Feb 2020 that

- The underlying root cause was identified. The mistake was not on my side

- They will provide the full 6% match into my 401k as if deductions had happened properly

- However they cannot deduct any 2019 employee contributions for me retrospectively. Instead they would pay me a penalty of 2% of my base pay as compensation (into my normal paycheck and not 401k) in 2020 which they said is "the standard IRS guidance" to fix the issue

- My 2020 deductions would happen as normal

My problem

I dont want the 2% fee to be paid to me (which will also be taxed). Instead I want them to fix the issue by deducting from my paycheck and depositing into my 401k what should have been done properly in 2019. I am willing to cover that from my 2020 salary (for both 2019 and 2020 deductions) or willing to transfer the amount back to the employer (I had given HR these options as well). Meanwhile I have filed a tax filing extension till Oct 2020 to get some runway to deal with this problem 

Advice needed

- Is my HR statement on the 2% penalty the standard IRS guidance? Or is there a way to get them to put in the proper amount into my 401k for 2019 contributions.

- If there are rules to get HR to do the right thing, any idea of the impact on my tax filing will be welcome. The company provides for me a tax attorny for the first year of filing and I will be discussing this with them anyway but any insight will be appreciated.

You can't make retroactive payments for 2019 for missed deferrals.  It's that simple; they and you don't have that option. PERIOD.  That seems to be your main request; the IRS correction process linked by ESOP guy gives you all the information that applies.  That is the fix, but it doesn't include the ability to recapture lost 2019 deferrals. 

Note: it took you from May to November to notice that your deferrals weren't coming out of your paycheck; the government considers that your fault.  You have a personal obligation to check on whether what you requested actually happened.  Sorry, but that's the way it works.

[ESOP Guy]

Let's be clear here the correction isn't write him a check like the HR group seems to be saying will happen either. 

The correction is a QNEC into the plan by the employer.   The QNEC as mentioned is employer money into the plan.  

[Riley Britton]

Totally agree with everyone else and why did you take so long to check?????

[chc93]

2 hours ago, Riley Britton said:

Totally agree with everyone else and why did you take so long to check?????

Pet peeve of mine... as Larry says, employee's fault... had many opportunities to check that deductions were taken correctly.  No room to complain, and have to accept the correction even if not what is expected.

[Mike Preston]

1 hour ago, chc93 said:

Pet peeve of mine... as Larry says, employee's fault... had many opportunities to check that deductions were taken correctly.  No room to complain, and have to accept the correction even if not what is expected.

But, having accepted the fact that there is a correction, it is not unreasonable to ask for the proper correction.  2% cash ain't it.  It is likely to be 25% or 50% QNEC into the plan.

[BG5150]

The first hurdle is to determine if the election to withhold 20% of pay was received in good order by the company/payroll company.  If so, then the 50%/25% (plus full match) is an accepted correction.  If not, then there may be no issue if the plan is not auto-enroll.

[newemployee401k]

All - Thank you for your responses.

Regarding the question of why I didn't notice the deductions...

Yes I should have been more diligent. But essentially I was relocated to the USA to work here on a work visa. I started working in May but my first pay check was in July (covering May-Jul work) after social security was issued (in Jun) and HR processed that. I also made my 401k contribution limit in by the end Jul deadline (applicable retrospectively) and I was told that it will take a few months to activate. Followed by a screw up in my medical deductions which when I highlighted I wad told that it was due to a migration to "workday HR software" and there are other issues and everything will be sorted out by Oct/Nov.  But the 401k never got sorted out. 

HR confirmed that I had made by election properly and the problem was on the backend side. Otherwise they would not offer the match or the 2% of base pay.