Foreseeing the 4 C’s: Payroll Errors and Your 401(k) Plan

August 4, 2021

401(k) errors in payroll are easy to make. Here are the foreseeable issues and ways to avoid them.

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4-C-ing Into the Future

In the past, we’ve discussed common payroll mistakes.  The list includes anything from misclassifying employees to prematurely shredding records.  While these blunders are certainly noteworthy, there are other payroll errors that should be on your radar.  Namely, what you could call the 4 C’s, or payroll errors pertaining to your company’s 401(k).

Thus, here is how you can self-review your plan in order to foresee problems and avoid some potentially major 401(k)-related payroll errors that would quickly come to light in a 401(k) audit. 


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The first C represents communication breakdowns.  Specifically, the left hand wasn’t talking to the right hand and things fell through the cracks.  These communication breakdowns include situations such as the following:

  • old deferral percentage or flat rate
  • plan amendments affecting eligible compensation
  • outdated pay rates

While these items are not the end of the world, they can be especially frustrating for the employee.  This is because it means the employee may not be capitalizing on the full benefit of the 401(k) due to human error or miscommunication. 

The good news is this can be easily avoided by implementing a few simple protocols.  First, when there are changes to eligible compensation or pay rates, the payroll specialist should be immediately notified.  This way, you can make sure payroll systems are updated to reflect the changes.  Second, the person responsible for processing payroll should always have a backup.  In other words, know to expect the unexpected, and have someone ready to step in to make sure the ball stays in play, even in the absence of the point person for payroll.  Third, get a second pair of eyes on the system in order to check the data for errors.  A fresh glance at the information can often catch any existing typos.


The second C of 401(k) payroll errors involves coding, which is a critical component of the interaction between the plan and payroll.  Coding is the way the plan links systematically to payroll so that the appropriate amounts are contributed based on the employee and the compensation type.  The following situations may occur if there is an issue with coding:

  • preliminary coding errors
  • overlooking of compensation code errors
  • outdated codes for merged employees
Related:  The Lowdown on Payroll Records

This particular C is not only frustrating for the employee, but it can create a web of confusion for the payroll specialist.  Which code is the correct code for merged employees?

Similar to the communication issues that may occur, coding errors can also be avoided with like protocol.  Again, you’ll want to review and verify codes for accuracy.  In the case of an acquisition or merger, previous codes may no longer be applicable.  Thus, you’ll need to update the eligible compensation codes accordingly.


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The third C pertains to the limits placed on contributions, otherwise known as caps.  Caps are put in place to make sure participants don’t exceed the allowable maximum of the 401(k) plan.  These limits are important, and messing them up is easy to do.  Here are some common errors pertaining to caps:

  • incorrect initial setup of caps
  • lack of updating caps

Employees who have exceeded their maximum contribution amount could end up with a refund of the difference.  This isn’t ideal, because had the caps been set up properly, they might have had the opportunity to invest somewhere else and maximize their investments.

It’s important that employees don’t exceed the caps and that their maximum annual compensation amounts are correctly adjusted after IRS makes their annual updates.  For this reason, you’ll want to also apply your protocol from the first two C’s to this third C as well.

Contributions Catch-Ups

The fourth C is all the catching-up that needs to happen with regard to contributions.  So, if you have employees who are 50 years of age or older, they may be eligible for catch-up contributions.  If this is the case you’ll want to make sure the catch-up is set up properly in your payroll system.  Here are some common errors:

  • catch-up contributions omitted
  • employer match catch-up contributions omitted
Related:  Transitioning Payroll Companies: Taking the Pain out of the Move

As you can probably see by now, if you follow the aforementioned protocol and review to make sure the system allows catch-up and catch-up matching on eligible employees, you’ll have done your due diligence where the four C’s are concerned. 

Safe Harbor 401k Plan

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Besides the 4 C’s, it’s important to mention how the Safe Harbor 401(k) plan comes into play.  In a nutshell, this type of plan is tax-deductible and levels the playing field concerning minimum contributions made to an employee’s 401(k).  The important things to know about the safe harbor 401(k) and payroll are as follows:

  • employers avoid testing restrictions
  • plans need to be submitted to the payroll implementation team by a deadline
  • plans need to be set up/adopted by the cutoff date

Deadlines and cutoff dates will be preestablished by your trusted payroll professional.

The 4 C’s in Hindsight

The purpose of this information is to help you avoid a hindsight-is-20/20 situation—especially where the four C’s of the 401(k) and payroll are concerned.  Hopefully, this shows you how to avoid a lot of frustration and time needlessly spent on errors.  Furthermore, it should give you some peace of mind about how you’re managing the 401k piece of payroll.  Finally, if you are ever uncertain about your 401(k), know your trusted payroll professional will gladly collaborate with you and your plan provider to help ease your struggles.

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