Employee elects Roth deferral by mistake

[30Rock]

Is there any remedy if an employee states that they made a Roth election in 2024  by mistake and it should have been pre-tax? The enrollment system is online, so it is possible they mis-read the entry. I am aware of this regulation below that states Roth is irrevocable. But what if it was a matter of an online error? Can the plan sponsor direct the recordkeeper to move it to the pre tax source and then record the  2024 W2 correctly?

The rules of IRS Reg. section 1.401(k)-1(f)(1) and (2) for designated Roth contributions under a 401(a) plan apply to designated Roth contributions under a section 403(b) plan. Thus, a designated Roth contribution under a section 403(b) plan is a section 403(b) elective deferral that is [IRS Reg. 1.403(b)-3(c)]:

Designated irrevocably by the employee at the time of the cash or deferred election as a designated Roth contribution that is being made in lieu of all or a portion of the section 403(b) elective deferrals;

[Peter Gulia]

The challenge is for the plan’s administrator to discern whether what a computer recorded as a Roth “designation” [26 C.F.R. § 1.401(k)-1(f)(1)(i)] was in fact the participant’s designation.

Just to pick a few examples, some administrators might be persuaded by evidence that the record was not the participant’s designation because:

the participant was hospitalized and unconscious;

the participant was mentally incapacitated; or

an unauthorized impostor used the participant’s identity credentials

when the computer received the ostensible designation.

Some administrators might consider undoing a record if one is persuaded it resulted from a mistake of fact—that is, the participant sincerely believed, and reasonably believed, that what the computer recorded as a Roth designation really was a non-Roth designation.

Yet, an administrator might be reluctant to ground an undo on a particular individual’s misreading of the plan’s (online) form or instruction for which mark makes a Roth or non-Roth designation unless the administrator prudently finds that many reasonable readers would similarly misread the form or instruction.

A challenge is getting evidence that supports the administrator’s obedience, prudence, and impartiality in finding that what the computer recorded as a designation was not the participant’s designation. To honor the plan’s provision based on tax law’s condition that a designation is irrevocable, a fiduciary would look for facts to distinguish a falsity or real mistake from a participant merely changing one’s mind.

Consider a fiduciary’s duties to make and keep records of its discretionary decision-making.

This is not advice to anyone.

[30Rock]

Thank you!

[Paul I]

Let's assume that no fraud is involved in the election process.  Had the election been made on paper, there would be no basis for challenging the election other than the participant's misunderstanding.  If the computer system was designed to confirm and reconfirm the election before formally accepting it on behalf of the plan, then there would be no basis challenging election.  If the computer system is unforgiving, then it is more credible that the participant just clicked the wrong thing and made a mistake.

Under a confirm and reconfirm process, the participant enters there election, the system displays a the election along with a short description of the election (e.g., "You elected to defer x% of your salary as a Roth deferral.  Your Roth deferral will not reduce the withholding of income taxes from your paycheck.  If your election is correct, please on the Accept button.  If your election is not correct, click on the Cancel button."  If the participant clicks on the Accept button, the election is recorded by the system with a date and time stamp, and becomes irrevocable.

I have seen a handful of situations where a participant elects a Roth deferral and calls up HR/Benefits/Recordkeeper after receiving their paycheck to demand that their election be changed.  In most of these situations, the participant did not understand that their net pay was going to go down by the amount of the Roth deferral and they experienced a form of sticker shock.

 

[CuseFan]

Mistake or not, the participant's actual election was executed, so I say have them fix it going forward and deal with it. Why is it always the collective "we" - plan sponsors, advisors, TPAs, RKs - that are asked to bend over backwards to accommodate a participant's mistake, poor judgment, or lack of attention? When is the participant held accountable for not doing what (s)he is supposed to and then months or years later comes looking for help on situation (s)he could have rectified almost immediately had (s)he paid the slightest attention? I'm sorry, but if I intended to make a PRE-TAX deferral from my pay and my income tax withholdings remained the same, I would have noticed and said something - if not after the first pay period, certainly within a few.

Sorry for the rant, and I don't do this administration so I don't deal with these situations - but you all do - and don't you have enough work and have enough plan sponsor and advisor administrative "issues" to fix already?

OK, I'm done.

Also, it's 9/11, so let's remember those we lost that terrible day and from its aftermath.

[Belgarath]

20 minutes ago, CuseFan said:

Mistake or not, the participant's actual election was executed, so I say have them fix it going forward and deal with it. Why is it always the collective "we" - plan sponsors, advisors, TPAs, RKs - that are asked to bend over backwards to accommodate a participant's mistake, poor judgment, or lack of attention? When is the participant held accountable for not doing what (s)he is supposed to and then months or years later comes looking for help on situation (s)he could have rectified almost immediately had (s)he paid the slightest attention? I'm sorry, but if I intended to make a PRE-TAX deferral from my pay and my income tax withholdings remained the same, I would have noticed and said something - if not after the first pay period, certainly within a few.

YES, YES, YES!!!

[Peter Gulia]

Work we did on September 11, 2001 and soon after in managing some consequences from that day’s deaths, injuries, casualties, and other harms remains a deep reminder about what matters in every aspect of our lives and faiths.

[Bill Presson]

5 hours ago, CuseFan said:

Mistake or not, the participant's actual election was executed, so I say have them fix it going forward and deal with it. Why is it always the collective "we" - plan sponsors, advisors, TPAs, RKs - that are asked to bend over backwards to accommodate a participant's mistake, poor judgment, or lack of attention? When is the participant held accountable for not doing what (s)he is supposed to and then months or years later comes looking for help on situation (s)he could have rectified almost immediately had (s)he paid the slightest attention? I'm sorry, but if I intended to make a PRE-TAX deferral from my pay and my income tax withholdings remained the same, I would have noticed and said something - if not after the first pay period, certainly within a few.

Sorry for the rant, and I don't do this administration so I don't deal with these situations - but you all do - and don't you have enough work and have enough plan sponsor and advisor administrative "issues" to fix already?

OK, I'm done.

Also, it's 9/11, so let's remember those we lost that terrible day and from its aftermath.

I agree with every word of this except “sorry.”

[CuseFan]

Ok, not sorry!

[fmsinc]

Do we know for certain whether or not the participant understood the differences between traditional and Roth deferrals?   

Were those differences explained to the participant by the plan administrator?  In writing

Is the Plan administrator required to provide such explanations to the participant?

 Was the election for confusing?  Ex:  [  ]  Roth  [ ]  Traditional

I have more than a few times been confused about which box to check, the one before or the one after.

Do you see 0% or 1% on the carton of mlk below?   

I would be stunned that any regular employee would have a clue about all  to the differences between Roth and traditional deferrals.