Overdeducted by one pay date

Hello - 

I have an instance in which an employee met their annual limit for 401k, but the payroll was configured incorrectly and it deferred once more beyond the annual limit. RK says 402(g), but with the market how it is, it doesn't seem fair the employee would take a loss on their excess distribution since it was employer's mistake. Is there an alternate solution? I was thinking about reversing out the excess deferral plus earnings/losses through the plan and reversing the deduction through payroll so it's taxed properly for the employee. Any advice is appreciated.

4 hours ago, cbadmin123 said:

Hello - 

I have an instance in which an employee met their annual limit for 401k, but the payroll was configured incorrectly and it deferred once more beyond the annual limit. RK says 402(g), but with the market how it is, it doesn't seem fair the employee would take a loss on their excess distribution since it was employer's mistake. Is there an alternate solution? I was thinking about reversing out the excess deferral plus earnings/losses through the plan and reversing the deduction through payroll so it's taxed properly for the employee. Any advice is appreciated.

Way too late to do that. Life's tough sometimes; of course it's "fair".  If he terminated that's all it's worth. Why should it be any different here. If the employer "feels bad" about it, just give the employee a little bonus to make up.  It can't be much money if it is only one extra payment (1/26 of the maximum or so on a bi weekly payroll).

I agree with Larry.  

Whoa! If, as seems likely from the OP, the over-deferral was the result of the employer's administrative error, it seems like on the tax side this needs to be corrected under EPCRS and on the fiduciary side there may need to be remedy for loss. Would of course need to know all of the facts, but it does seem to me like this alternative analysis is more likely correct.

In general, an Excess Allocation is corrected in accordance with the Reduction of Account Balance Correction Method set forth in Rev. Proc. 2019-19. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for Earnings).    The term “Earnings” refers to the adjustment of a principal amount to reflect subsequent investment gains and losses, unless otherwise provided in a specific section of Revenue Procedure 2019-19. 402(g) limits is a qualification error and not really a fiduciary error. It is interesting to think that simply the failure to correct timely is a fiduciary error.  The plan can not true-up for any loses to the participant's investments.  Any transfer of funds by the company of a "true up" would  be treated as a contribution and not treated as a corrective contribution by the IRS.  This would make any contribution to one employee (likely HCE employee) an allocation which would not likely be supported by the plan document and would likely create another qualification error.  My two cents is to have the company give him a bonus.  

Degrand, I don't know. We're getting into the weeds for sure, but take the worst case facts. I have deferred $18,000 by late December 2019 and I want to put in $1,000 more, so I elect that, say on a paper form that I hand to my payroll person at work. That person transcribes it incorrectly into Excel, and $2,000 is withheld. I don't notice immediately, but eventually the TPA catches the problem, and in the meantime because of investment loss the $1,000 is $800. The employee just eats the $200 error because "mistakes happen?"

Yes.  From the plan's point of view, the employee has a $200 lost attributed to the over payment.  If the company desires to "fix" it, they can provide him additional $200 in compensation (i.e. bonus) and minus out withholding, FICA, and all of the other deductions.  It is want would have happened if the company would not have made the administrative mistake.  

3 hours ago, Degrand said:

Yes.  From the plan's point of view, the employee has a $200 lost attributed to the over payment.  If the company desires to "fix" it, they can provide him additional $200 in compensation (i.e. bonus) and minus out withholding, FICA, and all of the other deductions.  It is want would have happened if the company would not have made the administrative mistake.  

Totally, Degrand.

Sorry all. I didn't realize I wouldn't receive notifications with the replies. Thank you for all of your responses. The termination example from Larry puts it into perspective.

I have another question along the same vein... In the case if it isn't a 402(g) issue (ex. there was an admin error of overdeducting like an employee changed from 10% to 2% but employer deducted 10% for a few pay periods, and the employee is still under the IRS annual limit). If the employee was notified and the requested to keep the deductions in his account rather than distributing it - would this be passable as a correction? We've documented corrections and controls to the process moving forward to avoid further issues.

cbadmin123, I cast my vote "yes" that that is acceptable correction.

1 hour ago, Luke Bailey said:

cbadmin123, I cast my vote "yes" that that is acceptable correction.

I agree; basically, I would say "ignore the whole thing"; life's too short.  Eat dessert first!