Reminder: 2020 Leap Year Highlights Extra Pay Period Challenge

An earlier version of this article was posted on July 22, 2019.

While February typically has 28 days, in leap years—such as 2020—it sprouts a 29th. That can be a headache for HR and payroll professionals—resulting in an extra payday in the calendar year, depending on when and how employees are paid.

The problem of an extra pay period isn't exclusive to leap years. However, it's during leap years that many employers encounter an extra pay period.

For 2020, "whether there will be an extra pay period and paycheck date depends on how the employer has directed that payroll be processed," said Mike Trabold, director of compliance at payroll firm Paychex.

Even in years without an extra day in February, there is the potential for additional paydays if the payroll is weekly or biweekly (every other week) "simply because 365 days do not divide evenly into the seven days of the week," Trabold said.

In any year with 365 days, there will be six days of the week that occur 52 times and one day of the week that occurs 53 times, he explained. In a leap year, with 366 days, there will be five days of the week that occur 52 times and two days of the week that occur 53 times.

"If an employer had a policy, for example, where it paid salaried employees weekly every Tuesday, in 2019, a nonleap year, it would have had 53 paydays," because Jan. 1 and Dec. 31 both fall on Tuesdays, Trabold said. "That same employer would have 52 paydays in 2020, which is a leap year."

For those years when an employer finds itself with 53 or 27 paydays, there are two general options, Trabold pointed out:

• Do nothing and pay the same amount for each payday, recognizing one extra paycheck in the year. This typically results in a higher payroll cost.
  

• Divide annual salaries by 53 or 27 paydays. This will result in smaller employee checks each payday, countered by an extra paycheck at year's end. For instance, if a salaried employee is paid $52,000 a year, an employer can recalculate the per-paycheck amount so it ends up working out to be $52,000 over 27 paychecks every other week instead of 26 paychecks. Employers electing this option should ensure compliance with the federal Fair Labor Standards Act and any relevant state wage laws, Trabold said.
  

[SHRM members-only online discussion platform: SHRM Connect—extra pay dates in 2020 for biweekly schedule]

Inform Employees

Adding an extra paycheck requires prorating each paycheck downward during the year, which could negatively affect morale. That's why in years with an extra pay period it's important to inform employees that their annual salary will come out the same despite slightly smaller paychecks for each pay period.

For example, New York's office of the state comptroller, which oversees payroll services for state employees, issued a bulletin on how leap year salary calculations would affect state agencies.

"In any fiscal year in which Feb. 29 falls, the biweekly salary calculation is changed to calculate the biweekly payment based on 366 days in that fiscal year," state workers were told. "Since New York State's current fiscal year began on April 1, 2019, and ends on March 31, 2020, it will include an extra day in February and paycheck amounts are being calculated to reflect the extra day."

Payroll Deductions for Employee Benefit Plans

In a year with an additional payroll period, consider the effect on payroll deductions and special wage payments. For instance, health plan premium contributions should, if necessary, either be adjusted to take into account the additional period or suppressed in the additional payroll period. A similar consideration applies to special wage payments that are based on 26/52 payroll periods, such as child support payments garnished from an employee's wages.

Employees should also understand how an extra pay period could affect benefit contributions to 401(k) plans, health savings accounts (HSAs) and flexible savings accounts (FSAs). Inform employees that an extra pay period could affect how much they wish to defer from each paycheck into their 401(k), HSA or FSA, Trabold advised. For employees who plan to fund these accounts to their maximum annual levels, an extra pay period will affect how much per paycheck they will need to contribute to reach those limits at year's end.

Adjust Payroll Systems

"Employers should ensure payroll and time-and-attendance systems are correctly programmed to recognize Feb. 29 as a valid day," Trabold advised. "Ensure the payroll and benefits departments make any necessary adjustments to payroll deductions and benefits contributions."

Some employees, however, may have contracts that inhibit the employer's ability to alter payment methods, such as a contract specifying a fixed weekly or biweekly salary versus an annual salary. Similarly, "any collective bargaining agreements which address this issue would have to be adhered to," Trabold said.

Tax withholding is typically calculated using a set of predetermined tables from the IRS and state tax agencies, he noted. However, in a year when there's an additional payroll period for an employer, weekly and biweekly payors should ensure that automated payroll systems adjust tax withholding, generally based on 26/52 payroll periods, to reflect 27/53 payroll periods.

Similarly, employees who want to deduct more or less than standard withholding may want to determine if they need to adjust their income tax withholding formulas.

Looking Ahead to Next Year

"Don’t forget to readjust calculations in the subsequent year," reminds consultancy EY. "If there was an additional pay period in one tax year, and the computer formula was modified to take into account the additional pay period, be sure to change the computation back to a pay period wage multiplication of 26/52 and a division of the annual tax by 26/52 for the subsequent tax year."

Related SHRM Resource:

Leap Year (2020) Payroll Wrinkle, SHRM Express Request