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401k catch up
Benefits & Compensation
401k catch up
Exchange ideas about health plans, retirement, work/life benefits, and employee assistance.
My department is in the process of assuming the payroll function in my organization. I am the HR Director.
We have a question about 401k deductions. Hopefully someone can point us in the right direct
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Forums » Topic Forums » Benefits & Compensation » 401k catch up
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401k catch up
posted at 10/7/2008 11:04 AM EDT
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Posts: 22
First: 3/11/2004 Last: 5/21/2010 |
My department is in the process of assuming the payroll function in my organization. I am the HR Director.
We have a question about 401k deductions. Hopefully someone can point us in the right direction. Here is the scenario: An employee (age 50+) has a 401k deduction set up as a flat dollar amount ($800) per pay period. The payroll system employs a "catch up" code to automatically activate in the payroll following the payroll in which the max was reached. However, in the payroll that brought the employee’s 401k to the max, the amount needed was only $250. Is it correct if the deduction that brought him to the max was less than the deferral he set up? Isn't the employer obligated to take the full deferral in each payroll? Should we manually switch this to the catch up code? Sounds like a nightmare if we have to watch every employee's 401k max. Thanks for any help. |
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401k catch up
posted at 10/8/2008 4:04 AM EDT
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Posts: 2146
First: 2/15/2006 Last: 9/14/2011 |
"Is it correct if the deduction that brought him to the max was less than the deferral he set up? Isn't the employer obligated to take the full deferral in each payroll? Should we manually switch this to the catch up code? Sounds like a nightmare if we have to watch every employee's 401k max. "
Yes, the last deferral will often be less than what the employee has requested since the maximum amount isn't always divisible by the election amount. The plan administrator is obligated to follow IRS/plan guidelines on maximums and they supersede the employee's election. Hence the reason that HCEs can also be limited without their election being changed by them. No, you are not obligated to take the whole deferral on that one. If you did, you would end up having to do a refund through the plan at the end of the year (which from experience is no fun). Depending on a combination of your payroll system and your 401k plan document, I suspect what should have happened is that the $250 should have been deducted to meet the regular maximum and then the $550 should have started in the catchup contributions (assuming the ee is old enough to meet the catchup standards). And that is assuming in the quote above that you are speaking of the basic maximum that was maxed not the catchup. It is the employer's responsibility to watch the maximum contributions for the year. And the employer's responsibility to refund any excess contributions over the maximum. Any good payroll system will be able to do so for you. It just needs to be programmed correctly to do so. You can also run a report based on current contribution pct/amount and multiply it by the # payrolls left...add in ytd contributions to see who will possibly max out. Of course deferral pct changes can happen often, but at least it would give you a smaller subset than checking the whole population. I also know that our 401k plan recordkeeper's system is setup to flag/error when a participant goes over the max. Usually they send the partial contribution back. And we refund/correct on the next paycheck (given that it is still in the same tax year). |
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401k catch up
posted at 10/8/2008 11:56 AM EDT
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Posts: 35
First: 8/3/2004 Last: 6/20/2011 |
An employee (age 50+) has a 401k deduction set up as a flat dollar amount ($800) per pay period. The payroll system employs a "catch up" code to automatically activate in the payroll following the payroll in which the max was reached. However, in the payroll that brought the employees 401k to the max, the amount needed was only $250. Is it correct if the deduction that brought him to the max was less than the deferral he set up? Isn't the employer obligated to take the full deferral in each payroll? Should we manually switch this to the catch up code?
Unless the Employee elects to do the Catch Up, your payroll deduction would have only been the $250. IF the employee wants to do the Catch Up then the original election would be withheld by using the $250 for the regular maximum, and then using the "catch up code" for the remaining $550 going towards the maximum catch up. The Catch-Up for those over 50 is NOT automatic -- it is up to the employee. |
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