Failure to Deduct Elective Deferrals

[Scott]

An employee made an election to defer a portion of his pay into the employer's 401(k) plan. Since then, the employer has deducted the elected amount from the employee's pay. However, through an administrative error, the employer has failed to deduct anything from the employee's pay for the last 2 pay periods. The employer realizes that the elected amount, plus earnings and any appropriate matching contribution, needs to be put into the participant's account.

To correct the error, can the employer deduct 3 times the normal amount from the employee's next paycheck? Or, does the employer have to "eat" the 2 missed deductions and pay that amount into the plan from its own coffers?

[Guest]

see Q & A 118 correcting plan defects- Brief exclusion of eligible ee from making deferrals. the logoc might apply to your case.

[Scott]

Thanks, but I don't think that applies. A fact I didn't mention is that the employee is terminating employment, and the next paycheck will be his last. So, he won't be able to make the maximum contribution for the last 9 months of the year, as required by that correction method.

[Guest MTransue]

I would think that the employer would be able to deduct the 3 times the deferral amount in the last paycheck of the participant. I say this, since there are scenerios that owner-participants "dump" their entire 402(g) limit of one paycheck into the plan.

One difficulty may be the limitations that some payroll companies may place on deferrals in relation to the compensation for the pay period (if this applies).

Otherwise, the ADP/ACP, 415, and 402(g) tests are completed on an annual basis, not on a pay period by pay period basis. As long as this "triple deduction" does not violate any of the annual limitations, I don't foresee why this isn't possible.

To avoid any "bad feelings", it may be in the employer's better interest to make up any lost earnings (if any, due to the behavior of the stock market).

[Guest DDoherty]

I am new to the message board and I apologize for the lengthy questions below. I have a client with a PYE of 12/31/2001 whose outside payroll provider failed to deduct the 401(k) Plan Contributions from the participants final year 2001 paychecks and in an attempt to fix:

1. The client wants to Fund the 401(k) deductions from the Client's Corporate Checking account so the money is in the participant accounts prior to 12/31/2001.

2. The outside payroll provider will then adjust the 2001 W-2 forms to include this 'missed deduction' as if the error of the missed contrib never occurred....and

3. The outside payroll provider will deduct the contribution money from the first payroll of each participant in January 2002.

Is this a legal and viable solution to fix the problem of a missed contrib. deduction...or could this be a disqualifying occurrence and what might the tax Implications be??

Thanks

[Guest Dook]

Though a course of action may already have been taken, I would have to recommend that no money interchange between the corporate account. If the participants are on-board with a double-deduction on the first January payroll, then the Employer money transfer only muddies the water and potentially sets up a legal problem when all of the double-deduction in Janaury does not get contributed to the plan (because one part of the deduction gets paid to the employer to pay back what they fronted, right).

Leave it up to the payroll service to monkey with the W-2's. It was their error that started it, they need to finish it. So long as the money gets sent within the 15 day requirement everything should be o.k.

Just my 2 cents.

[Guest DDoherty]

Thanks DOOK...my thoughts also...however the client had already decided to proceed despite my indication not to, although the method they used was slightly different. In addition to the missed 401(k) deductions......the payroll provider also had processed a company wide YE LTD Payout twice in error. In an attempt to fix the situation, the client then used the LTD Payout to cover the missed 401(k) Deduction instead of returning the LTD Payout to the participants. This seems to have worked out for the majority of the partic. If the LTD Payout EXCEEDED the missed 401(k) deduction the partic would receive the difference.

However, if the missed 401(k) Deduction EXCEEDED the LTD Payout, the client issued a 'bonus' check for the exact amount of the difference that the client considers a loan that will need to be paid back by the participant with the first payroll for 2002.

It seems that the water has just become very murky!!!

thanks again