Does my employer owe me 401(k) contributions that they forgot to take?
August 2, 2010 1:16 PM   Subscribe

Does my employer have to make elective 401(k) contributions for me if they messed up and didn't take any deductions from my paycheck this year? If so, how much? (You are not my HR professional or ERISA lawyer.)

I just learned that my company has not taken out any money from my paycheck for my 401(k) this year, even though I elected during open enrollment to max out my contributions (to $16,500). I have always maxed out my contributions in the years that I have been here; I usually choose a percentage of earnings that I know will get me to the maximum as close as I can to the end of December. Apparently when I reached the maximum contribution last year the deductions stopped, and through a payroll glitch they never started again in the new calendar year. At this point, I would have put in about $9750 if they had continued. I have put in $0.

With only 5 months of pay left this calendar year, if they take super high deductions each pay period I could still make it to $16,500, but my take home pay would take a noticeable hit. Our payroll person who told me about the glitch said that they were "talking to ERISA counsel" about what contributions were required on their side. That led me to this site and this IRS publication, but I can't really understand the conclusions drawn.

So, assuming that the company clearly acknowledges that this was their error (which to this point they do), what is their responsibility here?

(Yes, I theoretically could/should have noticed on my paycheck that they were not making this deduction, and I do look at my paycheck when it comes, but I just never realized that it was not there. I mean really, how often do you look at a man's shoes?)
posted by Duluth?! I Hardly Know Her! to Law & Government (10 answers total)
If you want deductions from your salary to reduce your taxes, the company can't make the contributions for you.

Your solution is to take large deductions for the rest of the year to make the maximum contribution. In the mean time, you have been taking home larger than usual paychecks. Have you spent it all? If you have been saving it, then you can use it to live on while your paycheck shrinks.

The company hasn't really harmed you in any way except made it harder for you to budget and smooth your spending. They don't owe you any money -- your income at the end of the year will be exactly the same. You are responsible for managing your budget.
posted by JackFlash at 1:32 PM on August 2, 2010 [1 favorite]

What result do you seek? Are you suggesting that they should give you extra money at this point (basically, give you a raise for the year) to make up for this payroll glitch? Or is there an employer match that you're missing out on?

if they take super high deductions each pay period I could still make it to $16,500, but my take home pay would take a noticeable hit.

Is it still possible to work with your HR person (or the 401(k) provider directly, which is how I've always done it) to make this adjustment? If so, you should do it. Yes your take-home will "take a noticeable hit," but you've been receiving that extra money throughout the year so far - even if you didn't notice at the time.
posted by rkent at 1:33 PM on August 2, 2010 [1 favorite]

One thing to check into is the company's formula for matching contributions. Sometimes they will match less if you make big contributions at the end of the year instead of spreading your contributions evenly throughout the year. If that is true in your case, you have a legitimate complaint and they may be able to fix it for you. However, written plan rules may forbid making exceptions and then you can only blame yourself for not keeping closer tabs on your paycheck. Surely the 401(k) deduction is printed on each pay stub?
posted by JackFlash at 1:43 PM on August 2, 2010

I think "jackflash" should be a pension correction specialist--or perhaps he is. If you are hoping for an opinion that shifts any of the responsibility to the employer I hope you do not pay too much for it. The basic assumption here is that your 401K contribution is your money and all employees must be treated the same. I do not know how the company could make up for the missed contributions that would not violate plan conditions or be extremely tacky--on the other hand IANAPSLOAJARE. ( I am not a pension specialist lawyer or accountant just a retired employer) I bet I will never have to use that again.
posted by rmhsinc at 2:00 PM on August 2, 2010

I'm trying to imagine the situation where I look at my pay stub, notice that I'm netting too much, that they aren't deducting for my 401(k) and do nothing about it for seven months. It's not coming to me. JackFlash has said it well and to the point.
posted by Old Geezer at 2:09 PM on August 2, 2010 [2 favorites]

My employer matches up to 5% of my contribution. If I contribute 3% the first half of the year and 7% the last half of the year, they will match 5% for my total contributions. I bet you might get your employer to do that for your remaining contributions, but they won't make YOUR contriubtions for you.
posted by TLCplz at 2:18 PM on August 2, 2010

Response by poster: Thanks for the answers so far. I should note that (1) I received a promotion and substantial pay raise this year, and (2) I travel a lot for work so there are often expense reimbursements that make my take home pay fluctuate, so I did not notice that I was netting too much.

Also, I realize that I have been taking home additional money and I will be able to afford it if I have to spike up my contributions. I am primarily asking about what ERISA requires of the employer where they do not make deductions where an employee has enrolled in a program.
posted by Duluth?! I Hardly Know Her! at 2:30 PM on August 2, 2010

I think, and the operative word is think" that unless it is specified in the plan document they only need to make the contributions by the end of the plan year. What they can not do is withhold your money and then not deposit it promptly into the plan. Your money should never be part of theie operating cash. They maybe required to file a form informing the IRS of the error--but I do not see why as long as it is paid in the plan year. I may have missed this but I assume there are no matching contributions--it does get more complicated then.
posted by rmhsinc at 2:57 PM on August 2, 2010

Your company screwed up, in a way that has a noticeable negative effect on you, but any legal action would be messy, unpredictable and unpleasant. Sounds like you can handle the paycheck reduction, so your best winning strategy is to be gracious about it, and make a friend in HR.
posted by theora55 at 4:21 PM on August 2, 2010

Best answer: If you are interested in the outcome, my link in the initial question to the IRS Publication gives the answer. The company determined that they were required to pay in all of the match amount that they would have paid, along with half of the contribution that would have come from my pretax earnings. I still have to substantially increase my deduction rate to make the maximum amount this year but I have a head start.
posted by Duluth?! I Hardly Know Her! at 8:29 PM on August 16, 2010

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