If you’re a plan sponsor, there are several reasons why you might need to make adjustments to wages or taxes on a payroll record. However, it’s important to understand that per IRS guidelines, once contributions are made into a 401(k) plan, they can rarely be reversed, even when adjustments are made within payroll.
If you need to make changes to contribution amounts only, Guideline may already have a process in place or be able to help without you modifying your payroll records.
When changes to compensation should not be made in payroll
The following scenarios do not require a change to payroll but instead must be handled by alternative processes. Attempting to address these issues through payroll could lead to plan failures.
Situation | Resolution |
An employee was automatically enrolled and didn’t want to participate | Depending on your plan design, the employee may be able to request a refund within their dashboard. You can share these instructions on the process.
The participant must make this request themselves; you cannot process this on their behalf or refund through payroll. |
An employee contributed over the annual IRS limit | Guideline identifies and corrects these through our regular processes. Changes should not be initiated within your payroll records to attempt to correct excess contributions as this could result in duplicate corrections, which could lead to additional failures. |
401(k) contributions were applied to a payroll for an employee you do not believe should be eligible to participate | Ineligible employee contributions will be refunded directly to the employee from the plan, and ineligible employer contributions will be moved to your plan cash account and used to offset your following employer contributions.
Participant eligibility will be outlined according to your plan documents. Please note, Guideline plans do not exclude part-time or seasonal employees from participating. If you're unsure whether specific employees should be eligible, contact Guideline. |
Why 401(k) contributions may differ between your payroll and Guideline
When a participant elects to contribute to a 401(k) plan, that election must be made and those funds must be deferred prior to the participant receiving compensation.
As a result, when you run payroll, deferrals are withheld from employee pay. If you later make changes to a payroll record after the employee has been paid, the original deferral often shouldn’t be impacted or changed because the employee has already received the related compensation.
Although there may be times when payroll changes are needed, the IRS has specific rules in place for when they can apply to 401(k) contributions. In the event they cannot be reversed, there are other ways that payroll adjustments may be handled.
Different payroll providers can have different methods of making corrections to payroll records. Therefore, it isn’t uncommon for payroll providers to make changes to payroll that can’t be reflected within the Guideline plan.
How 401(k) contribution changes should be handled with Guideline
Below are some common examples of corrections that may need to take place and how they must be corrected when necessary, per IRS regulations.
Situation | Resolution |
An employee was overpaid due to an administrative error | On the employee’s next regular payroll, reduce their wages by the amount they were previously overpaid. |
An employee received an extra paycheck by mistake after being dismissed due to an administrative error | Make changes within your payroll account to reverse or zero-out the paycheck. Contact Guideline to ensure the associated 401(k) contributions are removed from the employee’s account (these types of payments are not eligible to remain in the 401(k) plan). |
An employee was underpaid due to an administrative error | Pay the employee the amount they are owed as an upcoming off-cycle payroll, or add the amount owed to their next regular payroll. |
A payroll was run in duplicate or with duplicate deductions or wages | Have your payroll provider correct the payroll record, then contact Guideline to ensure the changes are processed successfully. |
When payroll was run, employee deferrals were applied as the wrong type (pre-tax vs. Roth) | Have your payroll provider correct the payroll record, then contact Guideline to ensure the changes are processed successfully. |
An employee was paid severance wages and had 401(k) contributions applied to those wages | Have your payroll provider correct the payroll record, then contact Guideline to ensure the changes are processed successfully.
Note that other types of compensation received after termination of employment are generally eligible for 401(k) contributions (final paycheck, accumulated leave, etc). |
401(k) contributions were applied to payroll for a non-employee contractor | Have your payroll provider correct the payroll record, then contact Guideline to ensure the changes are processed successfully. |
401(k) contributions were applied to a bonus or commission payment | No changes should take place because bonus and commission payments are eligible compensation for 401(k) contributions. |
An employee’s deferral rate was either higher or lower than they wanted, and they failed to change it in time for it to take effect on the payroll run | No changes should take place. Employees should expect to see deferral rate changes take place within 1-2 pay periods after being changed in Guideline. They can adjust future contributions to account for the difference, if desired. |
If you’re using a self-service payroll model and misreported payroll information to Guideline, this resource details how changes should be made within the Payroll section of your Guideline administrator dashboard.
What happens to the funds if a correction is made by Guideline
If contribution amounts need to be reduced, Guideline will move funds into your plan cash account or refund the funds directly to the participant, depending on the contribution type and the exact issue. Balances within the plan cash account are used to offset future plan contributions under the terms of your plan.
In your “Contribution Confirmation” email, you will see contributions being “Debited from Plan Cash" instead of "Withdrawn from Bank." We will generally deplete any outstanding eligible funds in the plan cash balance before withdrawing from your bank account. Please note that some types of plan cash funds can only be used to offset employer contributions.
The withdrawal source is also notated in contribution reports, which you can access from the Reports section of your Guideline administrator dashboard. You can read more about this in our Terms of Service.
In some cases, correction amounts may be less than the original contributions if there were market losses on the funds for the period of time where they were invested in the participant’s account.
If Guideline needs to send funds back to a participant directly, we’ll provide them with a Form 1099-R the following year. This form can be used by the participant to report the refund on their tax filing as necessary, and typically eliminates the need for adjustments to contributions reported on a W-2.