How do you handle 401(K) Catch Up on the Payroll side?

We use Fidelity as our 401(K) Administrator that allows those age 50 or older to elect pre-tax/Roth and catch-up. The problem is that many of our employees are electing catch up when they will not be maxing out on their pre-tax/Roth IRS limit. We only match on pre-tax and Roth.

This leaves us with the issue that what should be regular pre-tax or Roth is being captured as catch up in the payroll contribution side of things. We do not true up at year end or termination to ensure the match is correct so this is one issue.

However, I believe this can be corrected with some rule built in to only deduct regular pre-tax and/or Roth until capped out and then catch up deductions would begin. But I am not having much luck selling this.

Could anyone share how this is done in your system to avoid this type of issue? We use Workday payroll.

Thank you!

I don't have an answer for how to handle this in your payroll system, but from a plan perspective it's not a catch-up until a limit is exceeded. 

Electing it on a form doesn't make it a catch-up.  It's a catch-up once the annual limit is exceeded (or another plan limit).

We find many payroll systems and record keeper forms do not handle this well.

This discussion is not exactly the same, but may still be helpful. 

The payroll system should be adding both "regular" deferral and "catch up" deferral to calculate the match until the deferrals actually become catch up. D. Lewis provided the reasoning. This is exactly the reason I don't like separate elections for "regular" and "catch up". If you have one election then the payroll system just continues to withhold until deferrals reach 402(g) for non catch up eligible or 402(g) plus catch up for catch up eligible. 

As a recordkeeper, we do the same thing - dual elections from the start.  At the end of the year, if the participant hasn't met the criteria to be catch-up eligible (402(g), plan limit, etc.) we move the money to the regular deferral bucket until they do meet the limit.  This will be a huge problem though, when catch-ups for those making too much (in Congress' eyes) are Roth.....

Although my reply does not answer you directly, I would consider a smaller payroll company as well as an independent  TPA firm.  We have had many problems with the payroll companies "administration" that are more thoroughly handled with independent, whom smaller payroll companies have a much more beneficial relationship.  Your issue might not rven be an "issue."

Just my opinion.

I realized my answer may not have been very helpful, so I will try to add more as I have seen this many times. I think you have a couple options:

1. If you keep the Fidelity system exactly as is, then Workday needs to be coded in such a way to add deferral and catch up to get your total deferral rate then the system calculates the match each pay period. Then once an employee reaches 402g, the system needs to know to only use regular deferral to calculate the match. This route may be the best as it is just an admin coding change. 

2. Keep the elections and payroll as is and amend the document to add a true up.

3. implement one election at Fidelity that continues until you reach the limits. Workday then just calculates the match based on one total election. The problem with this is how you handle all the existing catch up elections. 

These are just ideas to further investigate as each has its own set of challenges.