For those entities that process payroll on a biweekly basis, 2020 was a special year because there were twenty-seven payroll periods, as opposed to the standard twenty-six periods! How often and why does this happen, how do you handle it, and what impact might this have on budgets?
How often does this happen? On average, the twenty-seventh payroll period occurs every eleven years.
Why does this happen? Every year ends with an extra day (or two in the case of a leap year) that, on average, creates an additional 0.0893 pay period per year. After eleven years, these additional payrolls add up to equal a full pay period. This is the same principle that leap year operates under, whereby the actual length of a calendar year is 365.24 days; after four years, we add a day for leap year.
How do you handle it? While there are a few ways to handle the twenty-seventh payroll, most entities will approach it as they would any other third payroll in a month. This will differ from entity to entity, but the same practices – i.e., insurance holiday – would apply.
The other option is to modify employees' wages for the entire year to equal what they would typically earn in a twenty-six-payroll year. Modifying wages is quite cumbersome and would need to be communicated at this time last year.
What are the budgetary impacts and other considerations? If you are on a calendar year budget cycle, paying out twenty-seven payrolls will indeed have an impact on your budget unless you planned and budgeted accordingly. If you are on a May-April fiscal year, there should not be an impact, as there are still only two three-month payrolls (July and December), and therefore the fiscal year will still only have twenty-six payroll periods.
Another consideration is how you handle deductions. If you take all deductions based on twenty-six-pay periods, you will need to suppress those deductions (i.e., health care and section 125 deductions). Also, you may run into contribution limit caps. You can either suppress those or see if your payroll software can add an annual limit so the system will automatically cease the deduction once it reaches the limit.
What if I pay at the end of December in January? This year is an exciting year for the twenty-seventh-payroll. Technically, there is no fifth Friday in December, so it is not a "three-payroll month." With January 1 being a banking holiday, however, entities are moving that payroll to December 31. If you decide to push off the January 1 payroll to the first banking day of 2021 (January 4), then you will push your twenty-seven-payroll year to 2021, with the third payroll months being January, July, and October.