Incorrect Payment Guide 

The information provided in this guide covers payroll topics related to over-payment policy, procedures, under-payment, flush pay and zero net pay.  Please contact the Payroll Helpline at (831) 459-2488 with any questions.

  1. Incorrect payment summary
  2. Impact of overpayment
  3. Audit complexities
  4. Overpayment threshold
  5. Option 1: Recovering from future earnings
  6. Option 2: Net overpayment calculation (Consultation with Payroll Office Required)
  7. Option 3: Cancel payment (Consultation with Payroll Office Required)
  8. Underpayment
  9. Flush Pay
  10. Zero Net

Appendix
Forms
Quick links to forms referenced in this guide are provided below.
 
Important Form Information:
Backup_for_Overpayment.pdfBackup_for_Overpayment
What to KnowFilter
Incorrect Payment Summary

Incorrect pay is discovered one of three ways:

  • Payroll Audit of Compute
  • HR or Divisional audit of time and attendance records and/or DOPE
  • Employee notification

Overpayments can occur from errors in:

  • Percentage of time on pay status (monthly rated) or hours on pay status (hourly rated)
  • Pay period end date
  • Rate amount
  • Employee ID
  • Time and Attendance
  • Lack of multi-unit coordination
  • Other miscellaneous errors

Begin by determining the cause of the error.  In an overpayment situation, the method of correction is determined on a case-by-case basis and will usually involve consultation with the Payroll Office.

Impact of overpayment

When an overpayment occurs:

  • Expenditure Accounts are debited (and credited, if the check contains any RX transactions).
  • Employment taxes are withheld and remitted.
  • Insurance/Benefits liability accounts are charged for premium amounts and carriers are paid.
  • Investment accounts are credited.

Each of the following areas will be impacted every time an adjustment such as (manual hand drawn check, overpayment calculation, or cancellation) is made:

  • Employee Earnings Records
  • Liability Accounts
  • Expenditure Accounts
  • Carrier Payments
  • Quarterly Federal and State Returns
  • W2 Reporting
Audit complexities

Adjusting gross pay is a complex process that includes reversing and canceling or recalculating University pay.  The following list details complications that must be evaluated and acted upon when incorrect payments are made.

  • Credit or Debit departmental expenditure account
  • Adjustment to total gross, federal gross, state gross, OASDI gross, Medicare gross and retirement gross
    • These adjustments can be further complicated by housing or meal PRQs, housing allowances, subsistence reimbursements, etc.
  • Adjustments to net pay are complicated by:
    • Non-reversible deductions such as select union dues, flexible spending accounts, faculty mortgages, wage garnishments, etc.
    • Investment account deductions which are outsourced to Fidelity Retirement Services.
      • High Level UCOP involvement is required for all adjustments to pay that involve investment accounts.
      • These deductions are subject to fluctuation in the market: if an adjustment is allowed (not all adjustment requests are granted), and the market has dropped by the time the adjustment is processed by Fidelity Retirement Services, the employee will owe back the original amount of the deduction, PLUS the difference of the balance of the account
      • Investment account deductions are very difficult to reverse without adversely impacting the employee.
  • IRS regulations: "...if an employee repays wages received in a year for which an employer has already filed [...] the employer shall not refund the attributable federal income taxes, nor shall any corrections be made..."
    • Employees may end up owing back more money than the original net of the check.
    • This situation most often occurs when an employee has been overpaid in the prior tax year.
Overpayment threshold

Adjustment is < (less than) 25% of normal pay:

  • Can be recovered in three months or less
  • HR Representatives have implied approval to adjust pay in OPTRS

For adjustments < 25% of pay, the most efficient method to adjust pay is usually an LX or RX entry in OPTRS, entered by the HR Representative.  If overpayment was discovered during a Payroll audit, the Payroll Office Accountant will instruct the HR Representative to make the OPTRS adjustment on the next payroll cycle in which the employee has sufficient pay from which to recover the overpayment.  Note: if overpayment happens over multiple months, See "Option 1, Recovering from Future Earnings" below.

Adjustment is > (greater than) 25% of normal pay:

  • Cannot be recovered in three months or less
  • Consultation with the Payroll Office is required.  The Payroll Office and the HR Representative will discuss:
    • Recovery from future pay
    • Net overpayment calculation
    • Cancel/Reissue

The Payroll Office will analyze each situation on a case-by-case basis, taking into consideration the concerns and information provided by the HR Representative. However, the Payroll Office will ultimately decide the method of recovery.

Option 1: Recovering from future earnings

Recovering an overpayment from future earnings is efficient and cost-effective.  This is the preferred method of recovery as it utilizes the Payroll system programming to affect recovery.

If an overpayment spans multiple pay periods, it is acceptable to distribute the recovery over the same period of time.  For example: an employee was supposed to be paid at a rate of $2000.00/month but was paid in error at a rate of $3000.00/month over a period of three months.  This is over 25% of the intended pay and consultation with the Payroll Office is required.  In this situation, the employee's pay would not support a reduction of $3000.00 on one paycheck; the Payroll Office may advise the HR Representative to code LX/RX transactions on the next three primary pay periods for the employee.  Assume the overpayment months were May, June and July.  See coding example below:

  • On August MO, code LX for PPE 05/31/XX at the correct rate of $2000.00, and code RX for PPE 05/31/XX at the incorrect rate of $3000.00
  • On September MO, code LX for PPE 06/30/XX at the correct rate of $2000.00, and code RX for PPE 06/30/XX at the incorrect rate of $3000.00
  • On October MO, code LX for PPE 07/31/XX at the correct rate of $2000.00, and code RX for PPE 07/31/XX at the incorrect rate of $3000.00

Note: This method of recovery is applicable to both < 25% of intended pay (HR authorized to adjust without Payroll Office consultation), and > 25% of intended pay (Payroll consultation required).

For more information on processing LX/RX transactions in OPTRS, please see the OPTRS Manual: Late Time Payment/Pay Reduction (EDLR).

Option 2: Net overpayment calculation (Consultation with the Payroll Office REQUIRED)

If the Payroll Office has determined that net overpayment calculations is the most appropriate method to handle the overpayment, we will instruct the HR Representative to complete the Back-up for Overpayment form.  Please use the forms available on our webpage; do not use earlier printed versions that may be in your files.

  • This form is to be used only after consultation with the Payroll Office.
  • The transactions coded for this method of recovery are not entered into OPTRS.
  • Once you have been instructed to do so by the Payroll Office:
    • Complete the Back-up for Overpayment form in full
    • Note unit contact information
    • Fax the Back-up for Overpayment form to the Payroll Office at 459-3702.
  • The Payroll Office will calculate the net overpayment.

Once the Payroll Office has calculated the net overpayment, we will send notification via email to the HR Representative with whom we have been conferring.  The email will contain a spreadsheet detailing the net overpayment calculations.  The amount is due and payable in full upon employee's receipt of the worksheet (payment plans are not an option).  The employee is notified of the amount due by the HR Representative who will complete an Overpayment Cover Letter and mail it to the employee.  The cover letter should:

  • Confirm the Overpayment
  • List the net amount due
  • Reference the enclosed spreadsheet
  • Instruct the employee to make checks payable to UC Regents
  • Advise the employee to send checks directly to the Payroll office:
    • Central Payroll Office
      1156 High Street
      Santa Cruz CA  95064-1077

Note: the Payroll Office does not communicate directly with the employee.

The Payroll Office will notify the HR Representative when payment has been received and credited to the appropriate expenditure account.  The Payroll Office will send quarterly notifications to HR Representatives listing ONLY the overpayments that are still outstanding for their units.  HR Representatives will follow up with the employee and CC the Payroll Office on any correspondence (email or written).

Option 3: Cancel payment (Consultation with Payroll Office is REQUIRED)

Cancellation of paper checks and reversals of ACH deposits are not always an option.  As noted above, there are many deductions that ARE NOT reversible.  In addition, timing is critical -- there is a very narrow window of time to reverse ACH deposits.

If the Payroll Office has determined that cancellation is the most appropriate method to handle the overpayment, the Payroll Office will instruct the HR Representative to complete the Back-up for Overpayment form.  Please use the forms available on our webpage; do not use earlier printed versions that may be in your files.

  • This form is to be used only after consultation with the Payroll Office.
  • The transactions coded for this method of recovery are not entered into OPTRS.
  • Once you have been instructed to do so by the Payroll Office:
    • Complete the Back-up for Overpayment form in full
    • Note unit contact information
    • Fax the Back-up for Overpayment form to the Payroll Office at 459-3702.
  • The Payroll Office will calculate the net overpayment.
Underpayment

If an employee has been underpaid, contacting the Payroll Office may not be necessary (an LX transaction on the next available compute in OPTRS and a Salary Advance is one possible solution).

The need for a salary advance should be determined only after consulting with the employee.  Issuance of a salary advance should never be done without explicit instruction from the employee.

If you believe the underpayment requires immediate action, contact the Payroll Office for guidance.

For more information on processing LX/RX transactions in OPTRS, please see the OPTRS Manual: Late Time Payment/Pay Reduction (EDLR).

Flush pay

"Flush pay" will result in no pay being issued to the employee.  These situations are discovered by the Payroll Office in the course of a post-compute audit.  Flush pay occurs when there is insufficient current monthly pay and/or no retro-active or additional pay from which to recover a negative transaction.  As a result, all pay transactions fail in the compute.

It is the responsibility of the HR Unit(s) to research transactions and determine the cause of the "flush".  If multiple units are involved in paying the employee, the correction must be coordinated between all impacted units.

Things to consider:

  • Was the RX in excess of 25% of the intended pay?
  • Will timing of the corrections cause a hardship to the employee?

The Payroll Office will annotate the PAN of the negative transaction (RX) that caused the problem, as well as send email notification to all responsible HR Unit personnel.  The HR Unit(s) must then respond to the Payroll Office with a correction plan that includes:

  • Schedule(s) on which all transactions will be resubmitted (scheduling the negative transaction (RX) on a pay cycle in which the employee will have positive pay sufficient to recover it)
  • Whether or not a Salary Advance is being considered
Zero net

Zero Net is different from flush pay in that with flush pay, all transactions fail in the compute process and must be rescheduled on a subsequent compute; zero net occurs when an employee has set up a voluntary payroll deduction(s) which is in excess of his/her net disposable income (gross pay less mandatory deductions).  Depending on the attributes of the deduction, it may have taken all available net pay, and may or may not result in the remaining balance of the deduction being held in suspense until future pay is available to draw against.

Examples

One: 403(b) deduction flushing pay

  • Employee normally has a gross of $3,200.00 and a net of $2516.00
  • Employee sets up a 403(b) deduction through At Your Service Online for $300.00/month and accidentally adds an extra zero, resulting in a deduction of $3000.00/month.
  • At compute, the 403(b) will deduct all that it can (after reducing taxable grosses) which, in this case, will be in excess of the net disposable income.  This will leave the employee with a "zero net" check.

Two: Salary Advance deduction flushing pay

  • Assume a 176 hour work month, with an advance calculated through the 15th of the month.  With weekends, assume that there are 11 working days.
  • Employee requested the salary advance in a prior working month for a personal emergency.  The advance was calculated on time worked to date of request (the 15th of the month).
    • 11 working days X 8 hour days = 88
    • 88 / 176 = .5000
    • $3700.00 X .5000 = $1850.00 X 60% = $1110.00
  • Salary advance issued for $1110.00
  • When preparing the Time Reporting Worksheet (TRW) the timekeeper for the unit mistakenly believes that he/she needs to adjust the employee's total time on pay status to 50% as well.
  • At compute, the salary advance will deduct all that it can but the total amount will exceed the net disposable income.  This will leave the employee with a "zero net" check.

In Example One, there is no adjustment to be made to the gross pay.  The employee's unit paid the gross that should have been paid.  The zero net occurred due to a deduction amount error.

In Example Two, there would be an adjustment necessary to gross pay (underpayment to the employee).  The employee's unit did not pay the appropriate gross pay.  The zero net occurred because of a percentage error.  The HR unit should contact the Payroll Office.