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  • 401k withholding issue California

    My employer pays us bi-weekly (26 pay periods).
    However they only withhold 401k once a month and base it only on that paycheck.

    Is this allowed?

    The reason they do this is because of the requirement to send in withholdings after the pay period and wanting to do it only once a month (they allow self-directed 401k so there are 7 checks to cut to fund about 43 accounts so it is understandably complex).

    The form I fill out says the % withholding is based on the gross pay each month. But it is not based on that. They pay bi-weekly so no matter what, it is complex to determine the month's earnings but also impossible when they do it on the second check in a three-check month.

    I am having a lot of trouble coming up with my withholding because I am hourly and get paid overtime that is equal to 10% of my annual salary. I truly need a percentage that comes out of every single check so that when I get paid overtime, it comes out of that pay and when twice in the year we get an extra paycheck, it comes out of that pay too. If I were to have a flat amount taken out each month, then my paychecks would be too low at other times during the year. I discussed this with management and was basically told I need to manage my money better and that they won't change their policy. 401ks exist for people like me who need help saving for retirement. If I was salaried, it would at least be predictable for me and my pay would be spread out more evenly.

    I have never worked anywhere that this was different. The Paychex rep we spoke to today suggested that I instruct my employer to hold back on paying some hours on certain checks so that the withholding comes out of a check with more pay on it. This seems insane. The only choice I feel left with is to withhold less than I really want to because it is too complex to try to make this work in their regime.

  • #2
    The employer can/must do whatever the plan document says, so ask to see the SPD (Summary Plan Document) for the 401(k) plan and read it. You can also talk to the 3rd party trustee if you want. All 401(k) plans must have one.

    As described, this is a very strange plan. Not inherently illegal, if that is actually what the plan says but I would really want to read the plan if I were you.
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

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    • #3
      I have no doubt that if the plan did not say they were allowed to do this, they would promptly amend the plan to allow it.

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      • #4
        One would hope. On the other hand, this is a strange provision, one that would make me want to read the SPD and double check EXACTLY what the plan says. I have worked for places where the people in charge of implementing the 401(k) had never actually read the plan. Fun times.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

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        • #5
          Sounds pretty strange to me, too.
          The above answer, whatever it is, assumes that no legally binding and enforceable contract or CBA says otherwise. If it does, then the terms of the contract or CBA apply.

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          • #6
            I agree it sounds strange. And I would NOT get into suggestions recommended by a payroll processing firm

            But tread carefully ..if you are technically correct but causing a pain ..there may be ways to eliminate pains.

            If you up your % withheld , might that not roughly create the end result you desire?

            You didn't mention if this comes up short on some sort of employer match...check the math.

            I am a bit emphatic with an employer trying to control administrative costs ....and it's always smart to consider your employers needs.....

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            • #7
              (I swear I posted this yesterday! but will post again...)

              It truly is going to depend on how "plan compensation" is defined in the plan document along with how deferrals are calculated. Definitely ask for an SPD. You also have the right to a full copy of the plan document (but you may be charged copying costs. I would hope they would have it electronically though). Also make sure you have a copy of the deferral form that you signed. If the form differs from the plan document, the document generally rules, but it shows that the employer made a mistake in communication. (eta: upping the deferral % could get you the same $ amount by the end of the year, BUT it might cheat on employer match if the match is based on only the first x % of the deferral)

              For all the plans I saw, processed, programmed, etc. while working for one of the Big 3 HR consulting firms, I have never heard of an employer doing it this way. Now it would possibly be legal if they are taking the full compensation for the month and just taking the deferral on the 2nd check of the month. BUT I suspect even the salaried employees would fuss on that because the two checks would be different net amounts. And if they are not a "safe harbor" plan , this would throw off their nondiscrimination testing and deferral %s wouldn't match back to what the employee requested. If they are truly only using the compensation on that one check (rather than full month), then yes, there is an issue.

              I do think they could change their process and still only calculate deferrals once a month -- but it would need to be based on the full month's compensation not just that one check (And I don't know of many payroll processors that would want to program it to be that different...again it is do-able but I am surprised the payroll company went along with it....they aren't 401k experts, but I would expect them to know enough to question and turn down weird clients)

              In the end you could also call the DOL/EBSA anonymously to get guidance on whether this falls correctly under the 401k rules. And they would let you know if you have any recourse for prior deferrals or lost employer match.

              eta: if you want a more in-depth 401k guru answer, you might post this on the BenefitsLink forum under the 401k questions. There are quite a few specific HR Benefits/401k gurus out there that can give you more specifics than I can. It's been a while since I have been directly involved in processing 401ks.
              Last edited by hr for me; 01-15-2015, 06:47 AM.

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              • #8
                Thanks everyone. There is no employer match. My goal is to put a certain amount away but without having to consciously change my deferral amount throughout the year and without having my checks during the non-overtime season fall below a certain minimum I need to cover living expenses.

                It is definitely calculated based on that one pay period that they take the deferral out. And whatever the SPD says, they will gladly amend it to fit what they want to do. Raising a stink about it would only result in a plan amendment, not a change in procedure unless what they are doing is not allowed under established laws. I would really like to be able to say 'defer 5% of all my salary' but that is really impossible with the way they have set it up unless I want to manually adjust each month which defeats the usefulness of a 401k plan for the average worker.

                Most people are salaried and compensated well enough that it is not a big deal for them to figure out a flat dollar amount per month and budget accordingly. It is only an issue for me because of the massive amount of overtime pay and the fact that I want to put in more during that time of year. Those with the decision-making power are the ones who contribute the maximum and wouldn't notice if they didn't get a check at all because they have enough savings and other income.

                Sadly, if they were allowed to hold onto deferrals from all pay periods and only deposit them once a month, that is what they would have done. But the rules about depositing timely make that impossible. I would gladly sign a waiver and allow them to defer from all checks but not pay in until the monthly deposit but that would not be allowed either.

                I spent 4 hours yesterday building an excel schedule to calculate my net pay for the entire year so I could adjust the percentage and make sure I contribute a certain minimum amount for the year without checks falling below a minimum threshhold. I am not putting away quite as much as I want to, and I could theoretically ask them to increase my percentage on the checks with overtime pay, but the only way 401k deferrals work for me is to lock them in and not tinker with them, otherwise there is always a reason to adjust them to get more income (Christmas, vacations etc).

                Comment


                • #9
                  While it is possible to write a plan which is illegal on it's face, it is not necessarily illegal to write a plan with "strange" provisions. I went to work for a very large employer you have all heard of a while back, and one of the first things I always do is read the benefit plans. Especially the 401(k). We were not in strict compliance with the plan. Worse, the plan on the one hand specified fast availability of funds for distribution to terminated employees but on the other hand had certain compensation which could not be determined until well after that particular 401(k) requirement had past. The obvious solution (which we ended up doing) was excluding certain types of compensation from the 401(k) wage definition. This required formally altering the plan, and brassed of a few employees (who tended to be brass themselves), but it fixed the problem. It is pretty common for well written plans to be very specific exactly what is and is not 401(k) wages. Such as taxable fringe benefits (IMO) should be excluded.

                  However if what the OP describes is true, that is a very strange provision where most normal payroll wages are excluded. Not inherently illegal, but really strange. And possibly illegal. If my company wanted to do this, I would strongly argue for an expert opinion. (And maybe the decision maker should have their meds checked).

                  As everyone else as said, the answer is always, read the plan document.
                  "Reality is that which, when you stop believing in it, doesn't go away".
                  Philip K. **** (1928-1982)

                  Comment


                  • #10
                    Originally posted by hr for me View Post
                    (I swear I posted this yesterday! but will post again...)

                    It truly is going to depend on how "plan compensation" is defined in the plan document along with how deferrals are calculated. Definitely ask for an SPD. You also have the right to a full copy of the plan document (but you may be charged copying costs. I would hope they would have it electronically though). Also make sure you have a copy of the deferral form that you signed. If the form differs from the plan document, the document generally rules, but it shows that the employer made a mistake in communication. (eta: upping the deferral % could get you the same $ amount by the end of the year, BUT it might cheat on employer match if the match is based on only the first x % of the deferral)

                    For all the plans I saw, processed, programmed, etc. while working for one of the Big 3 HR consulting firms, I have never heard of an employer doing it this way. Now it would possibly be legal if they are taking the full compensation for the month and just taking the deferral on the 2nd check of the month. BUT I suspect even the salaried employees would fuss on that because the two checks would be different net amounts. And if they are not a "safe harbor" plan , this would throw off their nondiscrimination testing and deferral %s wouldn't match back to what the employee requested. If they are truly only using the compensation on that one check (rather than full month), then yes, there is an issue.

                    I do think they could change their process and still only calculate deferrals once a month -- but it would need to be based on the full month's compensation not just that one check (And I don't know of many payroll processors that would want to program it to be that different...again it is do-able but I am surprised the payroll company went along with it....they aren't 401k experts, but I would expect them to know enough to question and turn down weird clients)

                    In the end you could also call the DOL/EBSA anonymously to get guidance on whether this falls correctly under the 401k rules. And they would let you know if you have any recourse for prior deferrals or lost employer match.

                    eta: if you want a more in-depth 401k guru answer, you might post this on the BenefitsLink forum under the 401k questions. There are quite a few specific HR Benefits/401k gurus out there that can give you more specifics than I can. It's been a while since I have been directly involved in processing 401ks.

                    hr for me - you also posted some info on 401(k) in thread:
                    http://www.laborlawtalk.com/showthread.php?t=313068
                    Could that be what you thought you posted in this thread yesterday - if not, don't know what happened to what you posted here previously.
                    Too often we underestimate the power of a touch, a smile, a kind word, a listening ear, an honest compliment, or the smallest act of caring, all of which have the potential to turn a life around. Leo Buscaglia

                    Live in peace with animals. Animals bring love to our hearts and warmth to our souls.

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