Gross pay insufficient to deduct 401(k) deferrals?

What happens if an employee's gross pay for a pay period is insufficient to cover the employee's salary deferrals and they are therefore not deducted in accordance with the employee's election? Is this a plan failure? 

I recognize this would be a rare occurrence, but think it's possible in a scenario where an employee has fixed $$ deductions that take precedence over benefits (i.e., child support, wage garnishments). 

Thanks in advance!

For whatever it's worth, my wife's 401k deferral was fixed $... when her fixed $ exceeded her gross pay, they deferred whatever was available, and her net check was zero.  Fortunately didn't have any other deductions that might take preference.  Lincoln Financial was the full-service TPA.  I didn't hear anything about a plan failure... but really didn't expect to hear anything.

I'm not an employment lawyer but I'd assume that you would reduced the elective deferral so as not run a negative check for the cycle. That is if the employer elected $200 but there is only $150 after required deduction you withhold the $150 and give him a net $0 check.

Would it be silly to suggest that the plan document would deal with the issue of priority of charges to pay and adjustment of the deferral election to fit the available amount?

Some employers might prefer that plans’ documents would state priorities about what to do when a worker’s paycheck lacks enough money to meet (all of):

Federal, State, and local taxes to be withheld;

child-support and other wage garnishments;

setoffs for amounts owed to the employer;

wage-reduction “premiums” and contributions for health, disability, life-insurance, retirement, and other employee benefits; and

wage reductions for dependent care, transportation, and other fringe benefits.

This can work well if one widely knowledgeable professional writes or edits the documents for the full range of the employer’s benefits. (In theory, it also should work if one human-resources person oversees the full range.)

But many employers use for each benefit a document from that benefit’s service provider. And even if all documents are from one service provider, IRS-preapproved and other off-the-rack documents typically don’t specify provisions of this kind.

If it’s not feasible to specify the details in the plans’ documents, an employer, in its role as the several plans’ administrator, might make a written procedure.

But who within an employer gets that task?

And if an employer needs an outside professional’s work, how much is the employer willing to pay for this?

20 hours ago, kmhaab said:

What happens if an employee's gross pay for a pay period is insufficient to cover the employee's salary deferrals and they are therefore not deducted in accordance with the employee's election? Is this a plan failure? 

Although it would be great if plan documents and/or written procedures dealt with this up front (and many do), I don't think it would be a plan failure to withhold taxes and amounts that had been elected, e.g. health plan contributions, before 401(k). The 401(k) plan is just one claimant among several others with lawful claims on the paycheck, e.g. Uncle Sam for FITW and FICA, state tax withholding, short-term disability, health plan, cafeteria plan. They all have legal claims on the money and the precedence among them should be based on the employer's reasonable triage of these claims, which would probably put the 401(k) plan last. You will probably want to amend the document pronto, however, if it can be read not to allow such flexibility, but I have never seen a plan document that would put deferrals ahead of taxes or other lawful claims. At worst, the wording is simply oblivious to this foreseeable practical issue.

To paraphrase someone's statement regarding the Constitution (think if was Marshall), "It's a 401(k) plan, not a suicide pact."

It’s easy to put taxes and garnishments ahead of voluntary wage reductions and deductions.

And many people put retirement last (or near last) in a triage.

The difficult choices are priorities among other employee benefits and some fringe benefits.

For example, many employers put health ahead of disability and other welfare benefits. But some employers, especially with workers who don’t drive to the work location, might put a before-tax transportation fringe ahead of other benefits, perhaps even health. Why? A worker who can’t afford her travel expenses to get to the employer’s work location could quit or lose the job.

And for those who think about a written procedure for this, does anyone know whether ADP, Paychex, and other big payroll-service providers have designed systems and methods for getting an employer customer’s instructions for dealing with this triage?

Great points by all. I have not seem documents with that sort of specificity, do your (BL groupies) preapproved plans have that sort of language?

Although document preparers have wised up over the years, I still see adoption agreements out there that list salary deferrals allowable up to 100% of pay even though we all know that is an impossibility.

Absent specific document language or an employer's (or payroll company's) governing procedures, how about incorporating the withholding hierarchy or stating where 401(k) sits on the hierarchy (subject to applicable law first and employer desires second) within the friendly confines of the salary reduction agreement?

We have recommended several companies we work with to adopt a priority list for voluntary deductions.  The majority of their employees were hourly with health insurance premiums, 401k deferrals, 401k loan payments, and some had court ordered child support payments and garnishments.

The link below is from the US Commerce Department and the companies we dealt with used it.

https://www.commerce.gov/hr/practitioners/compensation-policies/general-pay/order-of-precedence-from-gross-pay

The companies have not had an IRS or DOL audit over 401k deferrals being limited but I would think as long as a company has a procedure in place it would be okay.

Thanks to Dare Johnson for showing us the linked-to resource.

But understand that some elements of those priorities turn on the fact that the employer is the United States government.

Some priorities one might infer from that regime would not be appropriate for another employer.