NEW YORK (Reuters) - If you are an employee who is paid every two weeks, you may be in for a nice surprise this year.
For many employees, 2015 is a pay period leap year, meaning that there are 27 pay periods during the 52-week calendar year instead of the usual 26. This quirk happens about every 11 years, delivering a cash bonanza for many workers.
Some employers will be paying that 27th paycheck on top of regular salary, resulting in about a 4 percent annual raise, while others will redistribute the set salary among 27 checks.
“It all depends what’s in your employment contract,” says Debby Salam, director of payroll information management at Ernst & Young [ERNY.UL], one of the top four accounting firms.
Benefits also need to be redistributed and employees need to pay attention to the tax and retirement consequences to getting an unplanned cash infusion, it is not really a bonus. Those who have any biweekly payments - on mortgages or car loans, for example - should check to see if they will owe an extra payment.
The math behind this quirk is fairly simple: 26 pay periods only account for 364 days each year - 14x26, for those who like equations. The 365th days add up to a whole pay period over time, depending on what day you get paid and national holidays.
For employees who are paid weekly, an extra check comes every five or six years. Pay schedules reset back to normal the following year.
“It’s not that you’re getting a bonus, you did work the extra time,” says Doug Hass, a labor and employment law attorney for Franczek Radelet, based in Chicago.
For employees paid on Fridays, 2015 is a prime year since Jan. 1, 2016, falls on payday of what would be the last pay period in the year, so checks would presumably go out on Dec. 31. Employees who typically make $60,000 would make $62,307 after their 27th check.
You can get your paycheck schedule and details of your company’s plan for payment from your human resources department, Hass says.
After that comes the fun - and the responsibility - for employees of spending the money. Certified financial planner Kate Holmes, founder of Belmore Financial in Las Vegas, says she remembers watching her friends gleefully splurge with their unexpected checks 11 years ago.
But today, she urges responsible spending.
The dollar amount will be different for everyone. Her advice: come up with percentages on how you will allocate the money - for example, 50 percent to debt, 25 percent to savings and 25 percent to fun.
“This takes the emotional aspect out of it,” Holmes says.
On the retirement and tax front, consider whether the extra paycheck will push you over the limit for 401(k) savings if you are close to the maximum contribution, Holmes says. Most payroll systems will notice that, and stop accepting contributions, which means your last few checks of the years could be even bigger.
The income boost could have tax implications, pushing people close to a higher tax bracket over the edge. And some high-paid workers could be saddled with the Alternative Minimum Tax, which limits the deductions a person can take against income. Also, means-tested benefits - such as disability or health insurance - could be affected if you are suddenly making more.
But for workers with lagging retirement savings, the extra paycheck is a great opportunity to save more.
“You can tell HR, I want to put 50 percent of my (extra) paycheck into my 401(k). It’s usually pretty flexible,” Holmes says. “You can even have a whole paycheck go in and then be done contributing for the year.”
Editing by Lauren Young, G Crosse
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