I just discovered that over the last 5 years my employer has been underfunding the voluntary employee (mine) monthly contribution to my 401k. When initially hired I opted for a 5% contribution and then my company contributes at a higher rate. The company set my contribution at 5% of my salary at that time. Well, over time I've gotten raises etc. and they never increased the contribution along with my raises, they just kept the set number value. I didn't notice either as I would get paid take a look at deductions, and as I get bonuses and raises through the year the numbers are always different and I just make sure my pay was deposited. Well, 5 years later and about 5k has been missed in contributions.
My employer has been super dismissive about it, has refused to send me historical records, pay spreadsheets etc.. I've had to get everything I need from my W2s and this retirement fund service. I've given my company the evidence of how much has been underfunded and they've said absolutely nothing about it.
I'm researching and it appears there are IRS considerations and this should be funded at about 50% of the missing dollar amount by the employer. However, most of what I'm finding is either EMPLOYER contribution errors or INTENTIONAL underfunding where the company was pocketing someone's money. This is incidental and I'm wondering what the protocol is. I think part of my frustration is the complete lack of concern by my company and my own need to research and explain any responsibilities they may have here. Does anyone know what the official stance on this should be? What IRS implications and funding obligations the company would have?
Employer has been underfunding the employee contribution of my 401k
byu/hucksterme inpersonalfinance
Posted by hucksterme
7 Comments
This isn’t an infrequent problem. Here is the IRS bulletin.
https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-correcting-a-failure-to-effect-employee-deferral-elections
I can follow the first paragraph, but the second paragraph starts to stray into sentences that don’t really make sense. Maybe this was translated from another language?
Are you saying the employer failed to adjust the actual amount being deducted from your paychecks by sticking with a single, fixed dollar amount instead of adjusting to your elected percentage?
Or do you believe funds intended for your 401k were deducted then the employer was “pocketing” some of that money by not sending all of it into your 401k account?
Just not following the exact issue here.
You’re going to have problems with this because they’re just going to say “Sorry for the 401k thing, but the money was still paid out in your paycheck so tough.” They’re going to apologize but say you were the one that didn’t bother checking your contributions for 5 whole years to make sure things were being appropriately contributed as a % instead of a flat dollar amount.
Actually, I’ve never heard of an option to even allocate a fixed dollar amount of contributions for 401ks. Every one I’ve ever had has been you set a % amount.
But I suppose if, at any point previously, you had ever looked at your paycheck or W2 form, you could have seen that it hasn’t gone up with pay increases.
Not sure how that is your employers fault honestly. Thats like filling out your W4 and then not updating it for 5 years after many life and income changes and then being upset with your employer that they didnt withhold enough taxes. Thats not your employers responsibility…thats yours.
If your employer lets you set your deferred compensation as a percentage of your salary, and the doesn’t honor it, it is definitely a violation. IRS isn’t the concerned agency. It is the Employee Benefits Security Administration of the Federal Department of Labor.
The Feds are very strict about this. If you specified 5% of your salary to be deferred, and your employer has not increased the deferrals as your salary has increased, they are in violation of Federal law. There is no burden on you to notice or report the shortfall; the employer is in the wrong, and is required to make you whole, including lost gains in the market.
Speak to HR and tell them that if they don’t remedy the issue and make you whole (and everyone else affected) that you will be reporting them to EBSA, which will likely bring down a costly audit on the 401(k) plan.
My best guess is that they are obliged to make a contribution of one half of the sum of annual difference btw 5% of that year’s salary and initial fixed contribution