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In my last paycheck, the payroll processing made an error and deducted an extra amount for the 401K from the paycheck. I caught it as soon as I checked the paycheck, but by the time someone got to the bottom of it, the amount made it to the 401K account. Now I am told that the extra amount would be reimbursed in the next paycheck. The only way it could happen is to withdraw the extra amount from the 401K amount as the amount is already in the account. While the same company process the payroll and is the custodian of 401K account, I am concerned that the payroll processing company may not know all the complexities about 401K.

  • Would this "adjustment" be treated as withdrawal from 401K?
  • When and how would I find out if I can take the word of payroll processing department that it won't be treated as withdrawal?
  • The instrument that the amount gets invested has 90 days lock policy i.e. there is a penalty if the invested amount is withdrawn within 90 days. Would this "adjustment" cause that penalty? This probably would have to be dealt with by a different department and a different set of people even though it is the same company.

In the end I am responsible to the IRS for any interest and penalties even if the error was made by payroll processing company. I'm concerned about what I should do now when I can get hold of both my companies HR as well as same set of people in the payroll processing vs. months or years later being told that those guys back then did it wrong. The amount is significant enough so I would like it to be fixed, but if it is going to cause trouble down the road (especially with the IRS), I would rather just swallow the bitter pill now.

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    Can't they just take a smaller chunk for the 401k in the next period and average it out? – littleadv Aug 12 '13 at 17:30
  • No, the amount is significantly more than regular contribution and that is why I asked if it could be reversed. The only other way to adjust is to stop contributing all together after a month or so and that would present another challenge of employer matching. The excess withholding caused it to almost reach the yearly contribution limit. I am leaning towards that option i.e. to not do anything as it seems like least risky but wanted to check if what I have been advised is plausible. It could not be that first time that the payroll processing made these kind of errors. – amit_g Aug 12 '13 at 17:59
  • Also, when I reported this it was still early and I thought they would reverse excess amount before it makes it to 401K account as it usually takes 3-4 days to get reflected in 401K account. But by the time they figured it out and got to act it was too late. Now the only way is to adjust it in future either by contributing less or to withdraw the excess contribution (as I have been advised). – amit_g Aug 12 '13 at 18:04
  • This is not "excess contribution". "Excess contribution" is a term well defined in the Internal Revenue Code, and is a contribution above the yearly limits. – littleadv Aug 12 '13 at 18:25
  • Ah, I meant 'extra'. I understand that and was careful in the question itself but did not pay attention in the comments. Thanks for the correction. – amit_g Aug 12 '13 at 18:38
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If this was near the end of the year the concerns would be bigger because extra funds could take you over annual limits. It might also take you into the next year the get it straighten out.

You didn't specify in the question the dollar figures involved, but if the extra funds are large you want to get this solved quickly.

You do realize that there is a lag between when the money is debited from your paycheck by payroll and when it actually is invested into the 401K mutual fund. The IRS does set limits on how long they can take, they also realize mistakes are made. This type of backing out of funds happens all the time.

The thing you want to make sure is that the matching funds are handled correctly. If you put in 5% and they match you with a maximum of 5%. The extra funds from the paycheck were not matched. If they pulled out 10% from the paycheck, and they decide to pull zero from the next check to balance things out you would have lost out on matching funds.

Check the online system, to see if they already pulled the extra funds, and are just waiting for the next check to give you your money back.

The 90 day lockout is generally to stop employees from churning the accounts. This should not trigger a lockout. Generally you can move between funds at the same time you are investing new funds every paycheck. Some systems stop you from buying and selling too often by forbidding trades, some discourage you with a penalty.

If this is a mistake by HR, the payroll company, the 401K administrator, or the mutual fund, this can and should be resolved without penalties. This is not the first time it has happened. The longer it goes on, the harder it is to completely resolve due to the fact these investments can rise or fall.

  • The amount is significant and if not "fixed" I would have to stop contributing in a month or so as I would reach the yearly contribution limit. The employer matching is one of the reason that I wanted it to be fixed as without this error I would have reached the yearly limit in the last paycheck in Dec with full employer matching throughout the year. But since this is due to error or payroll I am willing to bet on the side of them continue to match even after I stop because of their error. HR would certainly be much simpler to deal with vs IRS especially since it was their error to begin with. – amit_g Aug 12 '13 at 18:11
  • I think the OP is referring to a short-term trading fee of a few percent for early withdrawal from certain mutual funds (there are a few funds like this in my 401k) rather than a lockout. – Craig W Aug 12 '13 at 18:39

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