If you’re a plan sponsor, there are several reasons why you might need to run a corrective payroll or make payroll adjustments that affect contribution amounts the company made to the 401(k) plan for employer matches or other contributions. However, once contributions are made into a 401(k) plan, they can rarely be withdrawn, even when a payroll reversal happens.
Instead, if a payroll is reversed, the funds are distributed into “plan cash,” which is an unallocated account within the plan. These funds must be used to offset future costs and contributions.
Reasons for reversing 401(k) contributions might include:
Deferrals were withheld from the wrong employee’s pay.
Payroll was processed with the wrong date or amount.
Employer contributions were calculated using the wrong compensation amounts. Note that since Guideline 401(k) plans generally include all types of compensation, this reason rarely applies. Find out what types of compensation must be included in401(k) contributions calculations.
If employee deferrals should be returned due to an error within employee paychecks, you’ll want to make these adjustments within your payroll provider.
The IRS does not allow payroll reversals to correct the following:
401(k) plan testing failures, including annual compliance testing and limits failures.
Contributions made via auto-enrollment. In this case, an employee may be able to request a refund within 90 days of the first auto-deferral, depending on the plan type.
If you have specific concerns governing your individual situation, you should contact your CPA or tax professional to determine what steps you should take in order to remain in compliance with the laws and regulations.
What happens to the funds once they are reversed by Guideline?
Guideline will move reversed funds to an unallocated account inside the plan trust. That balance will be used as a credit against future ACH collections under the terms of your plan.
In your “Contribution Confirmation” email, you can see contributions being “Debited from Plan Cash" instead of "Withdraw from Bank." We will deplete any outstanding eligible funds in the plan cash balance before withdrawing from your bank account.
The withdrawal source is also notated in contribution reports, which you can access from the Report section of your Guideline administrator dashboard. You can read more about this in our Terms of Service.
Note that the reversal amount may be less than the original contributions if there were market losses on the reversed funds for the period they were invested in the participant accounts. Additionally, funds held within plan cash are not eligible to receive earnings.