Starting with the first of this year, my firm switched to a new payroll company. Since before the switch, I’ve been having all of my 401(k) contributions go to a Roth. The new company’s pay stubs noted that my contributions were Roth - I checked to make sure.
Last paycheck, I saw a $200 lower amount than usual. It turns out that the new payroll company had been erroneously not withholding enough, because they didn’t notice that these were Roth contributions, not regular pre-tax contributions. That’s $400 a month not being withheld for six months.
I am steamed as hell that we’ll have a couple of thousand more in taxes next April that we weren’t expecting, as well as having $400 less a month going forward. Our finances will be very strained, as our current setup counts on that extra $400 a month.
I have to go into a meeting soon to discuss the “options” that the payroll company will offer me to resolve this. I don’t have high hopes that anyone is going to offer me two grand to help us out. I’m conflict-shy. Anyone have any good speeches to put in my mouth so that I can plead my case that this is someone else’s mistake and someone else should be liable for this shortfall?
Unfortunately, I think withholding the correct amount for your tax liability is ultimately your responsibility. It would have been good and nice for the company to be competent and withhold correctly from the start, but in the end it boils down to what you will owe in April next year. If they didn’t fix it now, you’d still be on the hook in April.
As for Options, you don’t have to contribute to the Roth. You can contribute to a regular 401k which is tax deferred. Going forward you can switch to contributing to a regular 401k, and withhold to cover what you put into the Roth previously, it will still be a ‘hit’ but less so.
Also, (and I’m not 100% sure on this) I think as long as we are still in the tax year in question, you can ‘recharacterize’ your contributions from earlier in the year to be to the regular 401k and not the Roth 401k. I think. They should be able to tell you in the meeting if that is possible. If you do that, then the lack of withholding should be okay since regular 401k contributions are tax deferred.
Sorry, unless you are somehow saddled with interest and penalties from the IRS for some reason then you haven’t lost anything and you’ll have to pay the taxes. The Roth contributions were made and you were given the money that wasn’t withheld. They may be able to help you spread those payments out over more time so you’ll only see a little more than $200 less per month now. Maybe you could get them to pay the interest if you end up paying the IRS late.
Didn’t you notice receiving $400 a month more for no reason? No offense there, it could happen to me, and sort of has, both my wife and I have had to declare fewer dependents in the past to get employers to withhold enough so we didn’t owe taxes at the end of the year. I’ve done something much dumber than that with the IRS also.
No, I happened to increase my contribution to my 401(k) (added the “catch-up” amount which is afforded older earners) at about the same time we switched over to the new payroll company. I expected to see a different take-home amount at that time.
Quick research says you cannot recharacterize 401(k) contributions after-the-fact like you can with IRAs.
There really isn’t anything you can do about your payroll processor screwing this up; there might be a breach of contract possibility, but there’s no monetary damage to you. Even if you could make some sort of promissory estoppel argument, you would have to show real economic damage. You’re simply being inconvenienced and really should be happy you got the $2000 or so that you did when you really shouldn’t have. Make sure by the end of the year that enough was withheld to avoid interest and penalties, possibly by sending in a check yourself to the IRS. I won’t go into all the details about how much exactly you need withheld to make sure that you won’t have interest or penalties, but I can if you’d like me to.
If money is that tight, why don’t you just not contribute to your 401(k) as much, or contribute to the traditional 401(k) instead? At least until whatever budgeting plan you have can be altered. If you’re taking advantage of catch-up 401(k) amounts, that’s a lot you’re deferring, and if you already made plans with the money that you’re getting, well, perhaps it’s too bad to be finding that out 6 months later that you’re stealing some of your money from your retirement, but life isn’t always perfect.
This is how we resolved it. I switched the nature of my contributions from Roth 401(k) to the traditional 401(k), which will increase my take-home pay back to what it was before. This will allow us to save up for the greater amount due the IRS this coming April.
Still sucks, though.
Most business’ will setup a deduction to a savings account.
Making it easier to save for your tax payment.