Allintus’ COO, Christopher Matz
Discusses payroll in a leap year

I know, you’ve probably heard it said a million times over the past few months, but I’ll say it again—I can’t believe we are in the year 2020! Not only are we moving into a new year, but a new decade, and as is often the case at “milestone moments,” many people evaluate where they are and lay out their plans for the coming year. Well, that should be no different for your payroll planning! Especially this year because it is a leap-year. And while you may be cruisin’ right along with your payroll processing, you’ll want to be sure you look at the impact a leap year will have on your payroll calendar.

Every 11 years or so you could run into an issue where you have 27 pay periods if you pay your employees bi-weekly, or the dreaded 57 weeks if you pay weekly. If your employees got paid on January 1, 2, or 3 this year, chances are this means you. In fact, for many employers, 2020 is that year!

Unfortunately, most payroll systems aren’t configured to automatically recognize these extra pay periods, so you’ll have to take measures to address them. From a system’s perspective, usually the solution isn’t too challenging, however, the employee communication around this can be challenging. Employees struggle to understand why they receive “one less paycheck” but are still paid the same.

The salary issue arises because bi-weekly pay programs pay employees in 14-day increments resulting in a 364-day annual pay cycle. Therefore, every 11 years or so a calendar year occurs with 27 pay periods instead of the typical 26. The 27 pay periods may create a compensation issue for salaried or contract employees because bi-weekly pay is typically calculated by dividing annual salary by 26 and employees are accustomed to a payroll amount based on this division. Continuing this practice will result in an extra paycheck, but the normal 26 pay periods will resume in the next year. This is a not a calendar timing issue since there are never years with only 25 pay periods to offset the years with 27.

Employers can approach compensation considerations in two ways:

  • Some employers adjust salaried employee bi-weekly compensation for the 27 pay period years by dividing the stated annual salary by 27 rather than 26 resulting in a lower pay for each pay period in the year. Salaried employees are paid the same gross salary in smaller increments.
  • Other employers allow the extra pay check and inflated compensation, not wanting to make temporary changes to the largely automated payroll systems.

While the compensation considerations apply to both salaried and hourly paid employees, option two has more impact on salaried employees, and option one really isn’t an option for hourly employees (I’ll explain later). Both approaches will require employee communication and may be influenced by an employer's past practice. Legal issues can arise from reducing the bi-weekly salary amount which should be considered as well. You’ll also want to understand the impact on deductions when there’s an extra pay period.

Deduction Considerations:

  • Retirement Plan Deductions:

    Contributions are typically taken in accordance with the employee's election based on actual wages paid and are not based on the number of pay periods (usually as a percentage of earnings). With the extra contribution, you’ll want to be sure these deductions remain under the limits for regular contributions and/or for catch up contributions. But bottom line, these typically do not require an adjustment for the extra pay period.

  • Benefit Plan Deductions (including HSA, FSA, DCFSA, etc.):

    If the Plan year coincides with the calendar year (plan year of 1/1 through 12/31) benefit plans which have an annual premium based on 26 pay periods will be affected by the extra pay period. The frequency of these deductions will determine if any adjustments may need to be made to account for the extra pay period.

  • If the deduction frequency is set to 1st & 2nd period of the month, then no action would be necessary. Your system is likely already configured to ignore months in which there are three pay periods in the month.
  • If the deduction frequency is set to: All Pay Periods AND you have chosen Compensation Option #2 I outlined above, then these deductions could be inactivated for the extra pay period. Easy-peasy (right?), just turn off benefit deductions during one pay cycle. Your employees will actually see a slight increase in their annual income because they are not only getting the extra paycheck, but you won’t be reducing it for the benefit plan deductions.
  • Tax Withholdings:

    Taxes are calculated and deducted and reported based on wages paid. Additional pay periods in the year have no impact. Thank you IRS!

All of the same issues above apply to a weekly payroll in a year when there are 53 weeks, and the solutions remain the same. For salaried employees, the employer can opt to skip a week, or as described above, reduce an employee’s weekly pay by dividing their annual salary by 53. The same considerations should be made regarding the impact of doing this, including the employee communication necessary to explain why their paycheck is less each week or why they will not receive a check in the 53rd week.

For hourly employees, they would still be paid in the 53rd week because they worked the hours. However, the employer most likely will want to suspend benefit plan deductions. Taxes apply to wages earned, so these withholdings would not be suspended. Likewise, retirement plan contributions can continue as they are based on wages earned.

Ah, what fun it is to think we have an extra day in 2020 to help us meet whatever personal goals we set for ourselves at midnight on January 1! Unfortunately for those of us in the payroll industry, we know all too well, there’s no such thing as a holiday.