Elective Withholding on Unpaid Vacation

Situation:  the payroll company was calculating elective withholding including unpaid time off which in turn has caused people’s deferral rates to be off.  

For example, if a participant worked 32 hours for the week, and then had 8 hours of unpaid vacation. the payroll company was taking 40 hours X $10 an hour X 5% to equal $20 of withholding.   However, the participant was only paid $320 and correct withholding would have been $16. 

$20 of $320 of comp is actually 6.25% withheld, not 5%.  So the withholding election was technically not followed based on what the person was actually paid.

This has been happening since 2014. Since its unpaid vacation it's not huge $ wise but what correction is to be made.

Wow, this is a weird one. Assuming no 415(c) contribution limit (100% of comp) or 414(s) (discriminatory compensation, e.g. if HCEs took disproportionately more unpaid leave) violations, I think the correction is going to be improve administrative procedures and oversight going forward. The qualification failure would be only failure to operate in accordance with plan document. Since it goes back more than 2 years, then unless you are comfortable on the numbers calling it "insignificant," to be safe you would need to make a VCP submission and have the IRS tell you that improving administrative procedures and oversight is your correction.

Were there any employer matching or other contributions made based on the error?

Thanks Luke - the total error despite going back to 2014 is only $2900 in over payments (elective flow is about $500k total each year) - there are no 415(c) issues or discrimination issues with HCEs (there is only 1 HCE in the group affected and he has one of the smaller overages)     there is no match so that isn't an issue and the annual profit sharing was calculated off payroll records with the correct compensation by the TPA    Thanks again for you thoughts on this - yes it is a weird one!