401(k): Solutions to common hassles
February 11, 2009 by Bill MeltzerPosted in: Retirement, Special Report
Even experienced benefits pros can struggle to keep on top of the feds’ arcane 401(k) reporting requirements and special-case distribution rules.
Here’s how to handle four areas where people often get tripped up:
1. Year-end 401(k) enrollment
Suppose you hired an employee in late December and he enrolled immediately in the 401(k) plan. His first contribution to the plan likely came out of a January check.
So should you count him in your 2008 plan report or wait until you file your 2009 report?
Answer: The feds say to wait until 2009 for record-keeping purposes, because he had no 2008 compensation from which he could make a salary deferral.
2. Distribution without consent
Generally speaking, you must contact a former employee for verification before making any 401(k) distribution over $5,000. But there are exceptions:
- distributions of under $5,000 made after age 65 (although best practice is to notify the retiree anyway), and
- situations where you’re unable to get current contact information for the person after at least four unsuccessful contact attempts.
In the latter case, keep in mind that your firm has limited choices for distributing the money. One legal option: transfer the money to a state unclaimed-property fund.
3. Contributions not withheld
What if an employee signs up for the 401(k) but, due to a clerical error, the money was never deducted from the person’s paycheck?
Here’s how to straighten it out: The IRS requires your firm to make the missing contribution on behalf of the employee, plus any related matching contributions.
Finally, you must also make up for any lost earnings on the money the employee intended to invest. Bottom line: This is a very expensive mistake to fix, but once its done, your firm is back in ERISA’s good graces.
4. Small refunds
Suppose Payroll accidentally took out a little too much money. Example: The department took out an extra $10 per check for three checks before someone caught the mistake.
Are you required to issue a $30 refund to the employee? Yes.
Tags: 401(k)
February 12th, 2009 at 4:26 pm
Hi,
Can a retiree’s annual leave payout be put into this type of account so that they pay the tax when they use the money from the 401?
February 12th, 2009 at 5:36 pm
Does anyone have documentation for #3? My company just deducts anything that should have been on the next check, making for unhappy employees.
February 12th, 2009 at 6:30 pm
Horror story — my 401(k) administrator deducted the contribution from the employees’ checks but did not depoti it in their accounts — and I didn’t catch it. The auditor caught it over a year later.
February 13th, 2009 at 10:19 am
Can you campare and contrast a 401k and 403b?
February 13th, 2009 at 5:26 pm
I was allowed to put over $14k in my 401k from a severance package from my old company in late 06 early 07.
In late 08 the administrator of the plan says that severance money is not allowable in a 401k.They had to pull $21k out (due to the market downturn)and send it back to me so I can be taxed on it, also lose the company matching portion and fund dividends.
Should I just sue the whole bunch?
February 13th, 2009 at 7:14 pm
shame on each employee who apparently did not check even once on his account balances for a whole year.
February 24th, 2009 at 5:01 pm
our company is requiring that employee cash-out their vacation banks over a certain threshold. Are those earninings 401k eligible?
April 2nd, 2009 at 4:39 pm
If your company pays your vacation pay out as W-2 compensation (don’t see how it can do it any other way) it MAY. Check your plan document or Summary Plan Description for 3 things.
1. Definition of Compensation – compensation may be defined to exxlude some items, vacation pay coule be one of those.
2. Check to see if the plan allows for a separate deferral election for bonuses. If it does, the employee can elect to have 0% to the plans max deferral percentage taken one time from the bonus if the employee executes a special election form before the comp is paid.
3. If there is no special election and their is no restriction on the definition of compensation, then the normally elected deferral percentage should be withheld and the payroll is in error if it is not.
RE Item number 3 in the corrections list – Rev Proc 2008-50 says:
(7) Correction for exclusion of employees for elective deferrals or after-tax
employee contributions. If a Qualified Plan has an Operational Failure that consists of
excluding an employee that should have been eligible to make an elective deferral under
a cash or deferred arrangement or an after-tax employee contribution, the employer
should contribute to the plan on behalf of the excluded employee an amount that makes
up for the value of the lost opportunity to the employee to have a portion of his or her
compensation contributed to the plan accumulated with earnings tax free in the future.
This correction principle applies solely to this limited circumstance. ……..Appendix A .05 and Appendix B 2.02 cannot, for example, be used to correct ADP/ACP
failures.
And the Appendixes show examples.
Not making an elected deferral constitutes excluding an employee who should have been eleigible.
All that said – we routinely adivse employers that have missed “A” deferral to check with the employee and see if it’s ok to double up. The lost opportunity cost on a deferral made 2 weeks late is pennies and hardly worth the time to do the cost calculations. But if your employer does this consistently, they should be reviewing the proceedure by which participants are enrolled.