Trace a bonus from plan compensation rules through payroll and funding. Learn how assigned reviews and documented corrections can reduce recurring errors.
March 18, 2024 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of March 18, 2024.
A payroll conversion can look successful because employees receive the right net pay. Yet a retirement-plan error may sit inside the new system: a bonus code was excluded, an election didn't transfer or an employer contribution used the wrong compensation figure. The paycheck arrives, but the plan is no longer operating as written.
The most useful control is a reconciliation between the plan document, payroll setup and the amounts received by the plan. Assigning that comparison to a specific person can reduce errors that otherwise continue unnoticed across many pay periods. A provider connection or automated file does not establish that the underlying instructions are correct.
Translate the document into payroll instructions
A plan may use different definitions of compensation for employee deferrals, employer allocations and testing. The payroll system needs to reflect the definition that applies to each task. A general assumption that “all wages count” or “bonuses never count” can be wrong for the particular plan.[1]
Create a written mapping of payroll earning codes to the relevant plan treatment. Include ordinary pay, bonuses, commissions, overtime and other items actually used by the business. Have the administrator confirm the mapping before the first affected payroll.
When a document changes, update the mapping and communicate the change to everyone involved. A plan amendment in the administrator's folder won't automatically alter the payroll vendor's configuration.
Also confirm who receives employee elections, when changes become effective and how eligibility is communicated. Each handoff is a place where correct information can become a missed instruction.
Test the system with an actual calculation
Consider a hypothetical employee who earns a $5,000 bonus and has elected to defer 6 percent of eligible compensation. Assume the plan includes this bonus in the deferral definition, the election applies and no contribution limit prevents the deferral.
The expected deferral from that bonus is $300. If the new payroll code excludes the bonus, the system may transmit nothing while still producing an apparently ordinary payroll report. The discrepancy becomes visible only when someone compares the election and plan terms with the calculation.
An associated employer match may also be affected. That calculation needs its own review under the plan's formula; the missing deferral doesn't establish the amount or method of every required correction.
The employer should document the affected pay period and employees, notify the appropriate administrator and obtain a correction analysis. Do not assume that taking an extra $300 from the next paycheck automatically fixes the problem. Applicable correction methods can involve additional requirements, timing and lost-earnings considerations.[2] Retain the original payroll data and the written correction instructions so the resolution can be verified later.
The point of the example is to identify the failure early enough to address it accurately, not to provide a do-it-yourself correction formula for every case.
Follow the money after payroll closes
Reconcile what payroll says was withheld with what the recordkeeper says was received and allocated. A successful file transmission doesn't necessarily establish that funds moved or were posted to the intended participant accounts.
For a plan with fewer than 100 participants at the beginning of the plan year, qualifying employee contributions deposited within seven business days after receipt by the employer or the date the amounts would otherwise have been payable to the employee in cash satisfy the DOL timing safe harbor. Outside that safe harbor, deposit the money as soon as it can reasonably be separated from employer assets. The following month’s fifteenth business day is an outer limit for pension plans, not their routine due date. A small plan’s ability to deposit sooner does not defeat its safe-harbor protection.[3]
Use a process that records payroll date, withholding totals, funding date, file acceptance and unresolved exceptions. When totals disagree, identify whether the issue is a missing employee, a rejected record, an incorrect amount or a funding delay. Those are different problems with different remedies.
Assign backup coverage. A process that works only when one employee is available can fail during vacation, illness or turnover even when the normal procedure is sound.
Make provider roles visible
The payroll company may calculate deductions, the administrator may interpret plan provisions and the recordkeeper may maintain participant accounts. Those roles can overlap, but the employer should not assume a task belongs to a provider unless the agreement and working process make that clear.
For an ERISA-covered plan, selecting and monitoring service providers can involve fiduciary responsibilities. A contract can delegate defined work; it does not justify ignoring information that the work is being performed incorrectly.[4] Track the time between identifying a discrepancy and documenting its resolution, rather than counting only how many automated files were sent.
Keep a short responsibility chart showing who prepares, reviews, approves and resolves each step. This need not become a large manual. It should be clear enough that the employer can identify the right person when an employee reports a problem.
Employees also need a simple way to raise questions. A participant who notices that a contribution is missing may be identifying a broader issue. Record the concern, investigate it and communicate the resolution without exposing other employees' information.
Review changes before they become recurring errors
A new payroll system, acquisition, plan amendment or compensation program should trigger a focused check. Test several employee situations, including new eligibility, changed elections and irregular compensation. Compare the first actual results with the expected calculations.
Track unresolved exceptions and repeat errors over time. Fewer exceptions and faster resolution can indicate that the process is improving, although they do not prove every legal requirement has been satisfied. The goal is a dependable operation with evidence of review.
Start with one recent payroll that included a bonus or other unusual payment. Recalculate the expected contribution for a sample employee, then trace it through funding and allocation. That small test can reveal whether the plan document and the payroll system are telling the same story. If that same coding error affects ten identical bonuses, the missed deferrals would total $3,000 before any correction calculations.
Related reading
- What the Employer Still Owns After Hiring a 401(k) Provider
- A Retirement Plan Review Should Cover More Than Returns
Have more questions about 401(k) payroll checks or a contribution discrepancy? Email Dave at dave@financialforte.com to discuss your questions and next steps.
The contact invitation is current; it does not imply this contact path existed on the historical reference date.
Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
Sources
- [1] IRS 401(k) Fix-It Guide — historical edition — Historical guide containing 2014 examples
- [2] IRS Revenue Procedure 2021-30 announcement — 2021-07-16
- [3] DOL final rule on employee contribution deposits — 2010-01-13; rule effective 2010-01-14
- [4] Meeting Your Fiduciary Responsibilities — September 2021
