Mayberry Shades, Inc. has a 401(k) plan with a match of 100% of the first 3% of pay someone saves. Joe, the CFO, elected to defer $500 into the plan each pay period. Mayberry has 24 payrolls a year and deposits the match each pay period. Joe made exactly $200,000 in 2015. He was expecting to see $12,000 in 401(k) deferrals and $6,000 in match go into his 401(k) account in 2015, but that isn’t what happened.
Joe was paid $150,000 in base pay and $50,000 in bonus pay. His end of year bonus was issued as a separate check from his base paycheck. Mayberry’s payroll system is programmed to take deferrals out of the first check written during a payroll period with no deferrals from any other checks that period. It also calculates the match on a check by check basis.
So here’s what Joe’s paychecks looked like during the year:
For the 24 regular pay paychecks:
Gross pay: $6,250
For the 1 bonus paycheck:
Gross pay: $50,000
Total match: $187.50 x 24 = $4,500
The payroll folks at Mayberry didn’t realize that the payroll system was coded in this manner, so when Joe asked why his match was only $4,500 for the year instead of $6,000, no one knew the answer. Eventually it was discovered that no employee should be set up with more than one paycheck in a payroll period. Only then would the match be correct.
How did they fix it
Joe had an audit completed for the last two years and it turns out that only 3 of the employees of Mayberry, a 3,000 employee company, had received two paychecks on the same payroll date. Therefore, under the IRS rules, this was considered a self-correctable error in that it affected a very small number of employees for a very small dollar amount. As a result, Mayberry deposited the missed match to the affected participants and trained all payroll staff that they should never create two checks inside their payroll system for the same payroll date.
Joe, in his position as CFO, was concerned that Mayberry had set up its payroll system unaware of this multiple paycheck issue. After discussions with the payroll department, Joe determined his staff didn’t have the retirement plan expertise to know if they were coding the payroll system correctly or not. Joe discussed this issue with his service provider team and ultimately decided to retain Fiduciary Outsourcing’s services to oversee the setup of the payroll system as it relates to the retirement plan.