Money Lessons > Retirement > 401K > Can Your Employer Reverse Last Year’s Payroll and Put the Money Towards Your 401K?

Can Your Employer Reverse Last Year’s Payroll and Put the Money Towards Your 401K?

A 401K plan is a retirement savings plan that allows employees to contribute a portion of their income before taxes, and employers to match some or all of the employee’s contributions. A 401K plan can offer many benefits for both employees and employers, such as tax advantages, employer-sponsored matching, and long-term savings.

However, sometimes there might be situations where your employer needs to make a payroll correction and reverse some or all of the 401K contributions that were made in the previous period. This could happen for various reasons, such as:

  • 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

In this article, we will explain what happens if your employer needs to reverse 401K contributions, how they can do it, and what are the implications for you and your retirement savings.

What Happens If Your Employer Needs to Reverse 401K Contributions?

Once contributions are made into a 401K plan, they can rarely be withdrawn, even when a payroll reversal happens.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.

The IRS does not allow payroll reversals to correct the following:

  • 401K 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.

How Can Your Employer Reverse 401K Contributions?

To reverse the match and ensure accurate payroll records, your employer can utilize the Adjust Payroll Liabilities feature in QuickBooks. Here’s how:

  • Go to Employees, then Payroll Taxes and Liabilities
  • Select Adjust Payroll Liabilities
  • In the Date and Effective Date fields, select the last paycheck date of the affected month or quarter
  • In the Adjustment is for section, select Employee. Then, select the employee’s name
  • In the Taxes and Liabilities section, select the Item Name column and select the payroll item for the 401K employer match
  • Enter the amount of the adjustment
  • Select Accounts Affected, then choose Do not affect accounts or Affect liability and expense accounts

The adjustment will still change the year-to-date amounts on your payroll reports.

What Are The Implications For You And Your Retirement Savings?

Reversing 401K contributions can have different implications for you and your retirement savings, depending on when and why they are reversed.

  • If your employer reverses 401K contributions due to an error within your paycheck, you’ll want to make these adjustments within your payroll provider.
  • If your employer reverses 401K contributions due to a payroll correction or adjustment that affects contribution amounts, they should use the Adjust Payroll Liabilities feature in QuickBooks to do so.
  • If your employer reverses 401K contributions due to a plan testing failure or an auto-enrollment contribution, they should not do so without following IRS rules.

By reversing 401K contributions correctly and timely, your employer can help you maintain a healthy and secure retirement plan that suits your needs and goals.

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