FAQs: Excess 401(k) Deferral Refund

I received a notice saying I have an “excess 401(k) deferral and a refund needs to happen. What does this mean and what happened with my account?

When you receive an excess 401(k) deferral refund, it means that you have contributed more money to your 401(k) account than is allowed by the IRS (Internal Revenue Service) regulations. This can happen due to various reasons, such as exceeding the annual contribution limits or making contributions that are not in compliance with your employer's plan or IRS rules.

How will I know what contributions are in excess?

Your HR team or plan administrator will review your 401(k) contributions and will calculate the excess contributions based on IRS rules and your specific plan's terms.

How will I know what next steps are in this process?

You will be notified by HR, your employer, or plan administrator that you have made excess contributions. This notification will include the excess contribution amount and details on how the refund will be processed.

What will happen with the excess contributions in my account?

The excess contributions, along with any associated earnings on those contributions, will be refunded to you. This refund is typically made by direct deposit, and it should occur by the end of the plan year or as soon as administratively feasible.

I heard I should not touch the contributions made into my 401(k) account because there are tax implications. Will this refund of excess contributions trigger this?

The refunded excess contributions are not subject to income tax in the year they were originally contributed. However, you may be subject to a 10% early withdrawal penalty if you are under the age of 59½, unless you qualify for an exception. (Another reason to keep a close eye on your paystubs!)

I really don’t want the withdrawal penalty- is there anything I can do to avoid this?

To avoid the 10% penalty, you can correct the excess contribution by withdrawing it from your account by the tax filing deadline (including extensions) for the year in which the excess contribution was made. In this case, you will still owe income tax on the earnings associated with the excess contribution.

How do I prevent this from happening to my account in the future?

To prevent future excess contributions, you may need to adjust your contribution rate and ensure it complies with IRS limits. Your HR team or plan administrator can provide guidance on this. For 2023 the IRS limit for contributions was $22,500/year (or $30,000 if you are over 50.) These limits are increasing for 2024 to $23,000/year (or $30,500 if you are over 50.)  Monitor your paystubs closely to make sure you are staying under the IRS limit and adjust if you are at risk of over contributing.

It's important to note that the specific rules and procedures for handling excess 401(k) contributions can vary depending on your employer's plan and the IRS regulations in effect at the time. Therefore, it's advisable to consult with your plan administrator or a tax professional to ensure you understand the process and any potential tax implications specific to your situation. Additionally, it's essential to monitor your 401(k) contributions to avoid exceeding the annual limits in the future.

Unveiling the Top Reasons Employees Bid Farewell

One of the most stressful parts of being a Founder is understanding employee turnover. Employee turnover is a huge concern for organizations and can be a very costly topic to ignore.  At Retain we partner closely with our Founders to focus intently on understanding the driving forces behind potential employee turnover as we believe this is essential for retention strategies. Below are the top four reasons we see employee turnover in organizations

1. Lack of Career Growth: The first major factor is a perceived lack of growth opportunities. When employees believe they have a stagnant career path within their company, they're more likely to seek greener pastures elsewhere. Companies that invest in professional development and offer clear paths for advancement are more likely to retain their talent. Implementing a learning and development (“L&D”) strategy, building a culture of mentorship, having a clear performance management program, and providing a dedicated HR resource to your team are items to consider to help build a culture of strong career growth.

2. Inadequate Work-Life Balance: A constant state of overwork and a lack of flexibility can lead to burnout and dissatisfaction. Employers that prioritize work-life balance, perhaps through flexible hours, floating holidays, documented leave of absence process, and remote work options, tend to have higher employee satisfaction rates.

3. A Toxic Work Environment: This includes issues like poor management, unhealthy team dynamics, or a lack of clear communication. Employees thrive in environments where they feel valued, respected, and heard. Companies that foster a positive and inclusive workplace culture are more likely to retain their talent pool. Making sure that managers are supported and trained to be supportive mentors while also providing the employees with opportunities to discuss workplace challenges in a safe environment are two key pillars from preventing toxic work environments.

4. Compensation and Benefits: Employees who believe they're undercompensated for their efforts are more inclined to explore other opportunities. This goes beyond just salary, encompassing benefits like healthcare, retirement plans, and additional perks. Companies that have a thoughtful compensation philosophy and intentional compensation plans that offer competitive total compensation (including benefits, and equity) packages demonstrate their commitment to valuing and retaining their employees.

Identifying and addressing the root causes of employee turnover is critical for any organization seeking to retain its talent. By offering growth opportunities, promoting work-life balance, cultivating a positive work culture, and providing competitive compensation packages, companies can create an environment where employees feel valued, supported, and motivated to stay for the long haul. And if these items feel daunting, be assured they are daunting for every founder. The importance is to prioritize building upon each topic as the company grows and to show that while you may not have all of the answers you value these areas and are committed to improving as you go. Solicit feedback from the team and lean on your HR resources for help in these strategies (we love this stuff!)

Unlocking Potential: The Power of Incentive Compensation

Incentive compensation is a successful (and sometimes complicated) method to motivate and reward employees for their contributions to the organization. Unlike traditional fixed salaries, incentive compensation offers a performance-driven approach that ties rewards directly to individual, team or company achievements. This approach not only encourages employees to go above and beyond in their roles but also aligns their efforts with the organization's strategic objectives. By offering tangible rewards for exceptional performance, incentive compensation creates a culture of excellence, driving increased productivity, innovation, and overall company success.

One of the key benefits of incentive compensation is its ability to boost employee morale and engagement. When employees see a direct correlation between their efforts and the rewards they receive, it instills a sense of accomplishment and recognition. This, in turn, fuels motivation and a drive to excel. Incentive compensation also promotes a competitive spirit within the organization, as employees strive to outperform themselves and their peers to attain greater rewards. In a healthy organization with clear goals and high levels of communication, this competition can lead to increased productivity, as employees work diligently to meet and exceed their targets, ultimately benefiting the organization as a whole

Incentive compensation can take various forms, including:

1. Commissions: Common in sales roles, employees receive a percentage of the revenue they generate. These are usually paid out either quarterly or annually 

2. Bonuses: A one-time payment usually tied to individual, team, or company performance.

3. Profit Sharing: Employees receive a portion of the company's profits, encouraging a sense of ownership.

4. Stock Options or Equity Grants: Employees are offered ownership stakes in the company, aligning their interests with its success.

It's essential to tailor your incentive plan to your business's specific needs and regularly assess its impact to ensure it continues to drive motivation and performance. It is also critical to have a well documented incentive compensation structure (that is distributed to and signed by all participating employees!) We have drafted many of these and are on deck to partner with you to design a compensation strategy for your company that aligns with your goals- reach out anytime for help!

Precision Pays Off: Why Accurate Payroll Is Non-Negotiable for HR

According to the American Payroll Association, 72% of Americans would experience financial difficulty if their paychecks were delayed by one week.

For many Americans, a paycheck is not just a source of income; it's a lifeline. It covers essential expenses like rent or mortgage payments, utilities, groceries, and transportation. If a paycheck is delayed by even one week, it can immediately disrupt an employee's ability to meet these basic financial obligations.

Ensuring that payroll is processed accurately and on time is not just a legal requirement; it's a fundamental aspect of employee well-being. Delays or errors in payroll can have far-reaching consequences for both employees and the company.

While the well-being of employees is always paramount, here are some key compliance and financial reasons why timely payroll is essential for a company:

• Legal Compliance: There are strict legal requirements governing the timely payment of employees. Non-compliance with these regulations can result in penalties, fines, and even legal action.

• Employee Satisfaction and Morale: Timely and accurate paychecks contribute significantly to employee satisfaction and morale. When employees receive their salaries on time, they feel valued and appreciated, which can lead to increased productivity and better job performance.

• Compliance with Benefits and Deductions: Timely payroll ensures that benefits, taxes, and other deductions are accurately and promptly processed. This includes contributions to retirement plans, health insurance premiums, and taxes.

• Avoidance of Costly Errors: Rushing through the payroll process to meet a deadline can lead to errors, such as incorrect amounts, miscalculations, or missed deductions. These errors can be costly to rectify and may also lead to further legal complications.

• Avoidance of Interest and Penalties: Late payments to employees can lead to interest charges and penalties, especially if there are legal requirements for timely payment in your jurisdiction.

• Maintaining Good Relationships with Vendors and Suppliers: Timely payroll is often linked to a company's overall financial health. Consistently late payments may signal financial instability, which can affect relationships with vendors, suppliers, and other business partners.

• Avoidance of Employee Discontent and Potential Legal Action: Delays in payroll can lead to employee frustration, discontent, and even legal action. Employees have the right to file complaints or take legal action if they are not paid on time.

• Compliance with Collective Bargaining Agreements: In unionized environments, there are often specific requirements for payroll processing outlined in collective bargaining agreements. Failure to meet these requirements can lead to labor disputes.

Ensuring timely payroll is not just a matter of administrative efficiency; it's a critical aspect of maintaining legal compliance, fostering positive employee relations, and safeguarding a company's reputation and financial stability. Many founders find payroll to be a daunting task given the layers of complexity- especially within organizations that span multiple states or countries. And while the variety of HRIS have made this process much more simplified, payroll can still be cumbersome. Please let us know if you have questions about payroll- we are happy to help!

Embracing Flexibility: The Benefits of Offering Flexible Work Locations

In the wake of a post-pandemic world, flexibility has emerged as a cornerstone of modern employment. And more and more we are seeing companies announce to their employees that being onsite will again become a requirement, and the majority of employees are not loving the news. While the abrupt need to adapt to working at home in 2020 was challenging (to say the least) for some, over the years most employees found a rhythm that they found to be beneficial to the ever elusive work/life balance, making going back onsite seems like less of an option for many. In a September 28, 2023 Fortune magazine article, employees are now pushing back on these policies, making it less likely that a blanket “return to work” policy is going to be accepted by the majority of the workforce. 

So what is the solution? We believe that allowing employees the option to choose their work location (assuming their role can be done remotely)—be it in-office, remote, or a hybrid model—offers a myriad of advantages for both employers and their teams. While face-to-face time will always be invaluable for any business, offering the employee flexibility that still effectively supports the business can be a huge win for any employer. Hear us out:

• Healthier Work/Life Balance:  Employees gain the autonomy to structure their workday around personal commitments, reducing stress and burnout. This balance leads to increased job satisfaction and a greater sense of well-being, which, in turn, boosts overall productivity.

• Increased Diversity and Inclusivity in the Overall Organization: By removing geographical barriers, companies can tap into talent from various regions, backgrounds, and perspectives. This diversity enriches the organizational culture and leads to more innovative problem-solving, as employees bring unique experiences and viewpoints to the table.

• Environmental Sustainability: With fewer employees commuting daily to a centralized office, there's a reduction in carbon emissions and a decrease in traffic congestion, among other advantages. This not only aligns with many corporate social responsibility initiatives but also reflects positively on the company's reputation and brand image. 

• Decreased Overhead: Companies have found that the ability to shift the previous budgets for office space, utilities, stocked kitchens, commuter costs, security, etc with previous onsite traditional workspaces to being able to truly invest in the product and also the individuals (trainings, technology, coaching, etc.) producing the products and accelerated the rate in which the company could realize overall goals.

• Enhanced Recruitment Efforts: In a competitive job market, offering the option to work from different locations provides a powerful incentive for prospective employees. It widens the talent pool, allowing employers to attract top-notch candidates who may have been previously restricted by geographical constraints.

• Building a Culture of Trust and Autonomy: When employers demonstrate confidence in their employees' ability to manage their workload from different locations, it strengthens the employer-employee relationship. This trust leads to increased morale, as employees feel valued and empowered to take ownership of their work. Will some people take advantage of this arrangement? Probably. And yet empowering your managers to monitor and coach their team (and providing an HR resource to help managers if they uncover anything going sideways here) is key.

Offering flexible work locations is a win-win for employers and employees alike.  By prioritizing flexibility, organizations can adapt to the evolving needs and preferences of their workforce, ultimately driving greater productivity and success.

401(k) Compliance Testing- What To Know

Providing a benefit like a 401(k) to your employees is an inexpensive and usually low maintenance benefit that is highly valued amongst employees. And yet, there are still some important things to know if you are the administrator of the plans- the biggest being compliance testing.

Compliance testing is required by the IRS at the end of the year to ensure a company’s 401(k) plan does not unfairly favor owners and highly compensated employees (HCEs) and that the plan stays within IRS-required limits. If your 401(k) plan fails any compliance testing, corrective actions must be taken within the timeline provided by your 401(k) provider.

In 2023 the IRS considers anyone earning more than $150,000/year a “highly compensated employee” (HCE) which is up from the previous threshold in 2022 of $135,000/year. In the event that specific IRS limits are exceeded, you or your 401(k) provider will need to process the excess contributions (depending on overage type.) Typically, excess employee deferrals will be processed as a refund to the employees and paid out to them by check or direct deposit by the end of the plan year or as soon as administratively feasible. We always suggest a clear communications plan for your team and the individuals impacted as there are usually a lot of questions as to how this happened in the first place and what the impact to them will be as this is processed.  We have communication plans ready to tailor to your company, but also have a FAQ here as a starting point for your impacted team. Excess employer contributions are typically processed as a forfeiture to the plan and will be used to offset future employer contributions until depleted. 

If your plan fails any of the below nondiscrimination tests, your 401(k) provider should contact you with details on how to correct the issue and the deadlines to do so as every provider has a bit of a different process. Note that if your 401(k) provider doesn’t receive compensation data in a timely manner, it can mean additional costs – particularly if your plan fails the ADP or ACP tests. Depending on your 401(k) participation rates within your company, we usually suggest either monthly or quarterly audits of the plan to make smaller adjustments as you go- if possible.

• Actual Deferral Percentage Test (ADP): This test compares the average deferral percentage of HCEs against the average deferral percentage of non-highly compensated employees (NHCEs). 

• If not compliant in this ADP test, you will need to correct this by either refunding HCE their excess contributions or by making employer contributions to NHCEs to restore balance.

• Actual Contribution Percentage Test (ACP): This test compares the average employer matching contribution percentage of HCEs against the average of NHCEs. 

• If not compliant in this ACP test, you will need to correct by either refunding HCE excess contributions or making employer contributions to NHCEs to restore balance.

• Top-Heavy Test: A plan is considered “top-heavy” when the owners and most highly paid employees (“key employees”) own more than 60% of the value of the plan assets. This ratio is tested every year based on the account balances on the last day of the prior plan year. If your plan is determined to be “top-heavy” you will need to correct this by having the non-key employees receive a minimum contribution under the plan. 

• Minimum required contribution for each non-key employee is the lesser of:

• Three percent, or 

• The highest contribution percent of any key employee (including deferrals that are not catch-up contributions)

Does all of this seem like a huge hassle? Yep, but necessary. Take a deep breath- we are here to help! Another idea/option that avoids the hassle of most nondiscrimination testing is to elect what is called a “safe harbor plan.” A safe harbor plan provides all eligible plan participants with an employer contribution. In exchange, safe harbor plans allow businesses to avoid these annual IRS nondiscrimination testing. If your company has the budget to sponsor an employee match this can be a huge win for employee morale, future recruiting efforts, avoidance of these compliance tests, and these employer contributions are deductible on the employer’s federal income tax return (to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.) Email us at hello@retainhr.com if you want to chat about this more or need help- we are on deck. 

The HR Imperative for Start-Ups: Nurturing Growth from the Ground Up

In the whirlwind of excitement that surrounds the launch of a start-up, Human Resources (HR) often takes a backseat. Entrepreneurs are typically focused on product development, marketing strategies, and securing funding, leaving HR considerations for a later date. However, this approach can be a costly oversight. Here, we delve into the critical need for start-ups to prioritize HR support from the very beginning.

Attracting and Retaining Top Talent

In the competitive landscape of start-ups, the battle for top talent is fierce. Without a dedicated HR function, crucial tasks like crafting compelling job descriptions, conducting effective interviews, and negotiating competitive compensation packages are often handled on an ad hoc basis. This haphazard approach can lead to missed opportunities and hiring missteps. A skilled HR professional brings expertise to the recruitment process, ensuring that the right people are in place to drive the company's vision forward.

Creating a Strong Organizational Culture

Start-ups thrive on innovation, agility, and a shared sense of purpose. A well-defined organizational culture provides the foundation for these attributes to flourish. HR professionals play a pivotal role in articulating and cultivating this culture from the outset. They are instrumental in establishing core values, fostering a collaborative work environment, and designing programs that promote employee engagement. A strong cultural foundation sets the tone for success and helps to attract like-minded individuals who are aligned with the company's mission.

Navigating Compliance and Mitigating Risks

In the fast-paced world of start-ups, the intricacies of employment laws and regulations can easily be overlooked. However, non-compliance can have severe consequences. HR professionals are well-versed in labor laws and can ensure that the start-up operates within legal boundaries. This includes everything from drafting employment contracts to handling payroll and benefits administration. By mitigating risks and ensuring compliance, HR support safeguards the company's reputation and financial stability.

Laying the Foundation for Scalability

As start-ups grow, they often face rapid expansion and evolving organizational structures. Without the foresight and expertise of HR professionals, this growth can lead to chaos and inefficiencies. HR support is crucial in designing scalable systems and processes that can accommodate increased workloads and a growing workforce. From performance management frameworks to training and development programs, HR lays the foundation for sustained success.

The critical need for start-ups to have HR support cannot be overstated. By prioritizing HR functions from the outset, start-ups set themselves on a trajectory for sustainable growth and long-term success while avoiding unnecessary and potentially crippling risk. From attracting top talent to nurturing a strong organizational culture to keeping a company out of legal hot water,, HR professionals play a pivotal role in shaping the future of these budding enterprises. Plus, it frees up founders and their teams to being able to focus on the product and get it out into the world faster. If you want to explore how you could partner with us to help with your HR needs, feel free to reach out to hello@retainhr.com and we can get a call scheduled!