After running payroll, you may need to adjust 401(k) contribution amounts. The right way to make a correction depends on the situation. Here is when to make changes in payroll and when to work with us instead.
Before you adjust wages or taxes on a payroll record, know the basic rule. Per Internal Revenue Service (IRS) guidelines, once contributions go into a 401(k) plan, they can rarely be reversed — even if you later adjust the payroll record.
If you only need to change contribution amounts, we may be able to help without any changes to your payroll records.
Some situations call for a different fix outside of payroll. Trying to fix these through payroll could lead to plan failures.
Situation
Resolution
An employee was automatically enrolled and did not want to participate
Depending on your plan design, the employee may be able to request a refund from their dashboard. You can share these instructions. The participant has to make the request themselves — you cannot process it on their behalf or refund through payroll.
An employee contributed over the annual IRS limit
We identify and correct these through our regular processes. Do not change your payroll records to fix excess contributions — this could lead to duplicate corrections and more failures.
You ran 401(k) contributions on payroll for an employee who should not be eligible
We refund ineligible employee contributions to the employee directly from the plan. We move ineligible employer contributions to your plan cash account to offset your future employer contributions. Your plan documents outline participant eligibility.
Note: Gusto 401(k) plans do not exclude part-time or seasonal employees from participating. If you are unsure whether specific employees should be eligible, contact Gusto Retirement.
When a participant chooses to contribute to a 401(k) plan, they make the election before they receive a paycheck. Their contributions come out of pay automatically.
When you run payroll, contributions come out of employee pay. If you change a payroll record after the employee was paid, the original contribution usually cannot be changed. The employee already received the wages tied to that contribution.
You may need to change payroll at times, but the IRS has specific rules on when those changes can apply to 401(k) contributions. If a contribution cannot be reversed, there are other ways to handle the adjustment.
Different payroll providers correct payroll records in different ways. Some providers can make changes that we cannot reflect in your Gusto Retirement plan.
For hourly employees, we annualize the hourly rate based on a 40-hour work week. If an employee works fewer hours, their estimated compensation will look higher than their actual earnings. We use this estimate so compensation projections in your dashboard and your employees' dashboards are not understated.
If you want to update an employee's compensation to better reflect their actual earnings, contact Retirement Sponsor Support for help making the change.
Here are common corrections you may need and how to handle each one per IRS regulations.
Situation
Resolution
An employee was overpaid due to an administrative error
On the employee's next regular payroll, reduce their wages by the amount they were overpaid.
An administrative error caused a dismissed employee to get an extra paycheck
Make changes in your payroll account to reverse or zero out the paycheck. Contact Gusto Retirement to make sure we remove the 401(k) contributions from the employee's account. These payments are not eligible to remain in the 401(k) plan.
An employee was underpaid due to an administrative error
Pay the employee the amount they are owed in an off-cycle payroll, or add the amount to their next regular payroll.
A payroll was run in duplicate or had duplicate deductions or wages
Have your payroll provider correct the payroll record. Then contact Gusto Retirement to make sure the changes go through.
Employee deferrals were applied as the wrong type (pre-tax vs. Roth) when payroll was run
Have your payroll provider correct the payroll record. Then contact Gusto Retirement to make sure the changes go through.
An employee was paid severance wages and had 401(k) contributions applied to those wages
Have your payroll provider correct the payroll record. Then contact Gusto Retirement to make sure the changes go through.
Note: Other types of compensation received after termination are generally eligible for 401(k) contributions, like a final paycheck or accumulated leave.
401(k) contributions were applied to payroll for a non-employee contractor
Have your payroll provider correct the payroll record. Then contact Gusto Retirement to make sure the changes go through.
401(k) contributions were applied to a bonus or commission payment
No changes are needed. Bonus and commission payments are eligible compensation for 401(k) contributions.
An employee's deferral rate was higher or lower than they wanted, and they did not change it in time for the payroll run
No changes are needed. Employees should expect deferral rate changes to take effect within one to two pay periods after they are changed in Gusto Retirement. They can adjust future contributions to make up for the difference if they want.
Note: If you use a self-service payroll model and misreported payroll information to Gusto Retirement, this resource explains how to make changes in the Payroll section of your administrator dashboard.
If a correction reduces contribution amounts, we move funds into your plan cash account or refund them to the participant directly. The right path depends on the contribution type and the exact issue. We use balances in the plan cash account to offset future plan contributions, under the terms of your plan.
In your Contribution Confirmation email, you’ll see contributions listed as “Debited from Plan Cash” instead of “Withdrawn from Bank.” We generally use any eligible funds in the plan cash balance before withdrawing from your bank account.
Note: Some types of plan cash funds can only be used to offset employer contributions.
Contribution reports also show the withdrawal source. You can find these reports in the Reports section of your Gusto Retirement administrator dashboard. For more details, see our Terms of Service.
In some cases, correction amounts may be less than the original contributions. This can happen if there were market losses on the funds while they were invested in the participant's account.
If we need to send funds back to a participant directly, we’ll provide them with a Form 1099-R the following year. The participant can use this form to report the refund on their tax filing. It typically removes the need to adjust contributions reported on a W-2.