401 (k) question

[DFA]

I am getting a distribution from my last year's 401(k) contribution because the company ran a 401(k) audit and determined that the highly compensated staff contributed a higher percentage of their income over the rest of the staff.

Never heard of this before and wondered if anyone else has had this happen

 

[ziggy29]

Never happened to me, but yes, this can happen when a plan is "top heavy" and too much of the plan's contributions come from the highest-income employees.

Frankly I think this is a bad law, especially when someone isn't covered by a defined benefit plan and they need as much personal retirement savings as possible. But it is what it is. About all a company can do is encourage lower-income employees to contribute more, something that isn't easy to do when more and more people are struggling just to make ends meet.

 

[Rustward]

Have had small distributions for various reasons, none of which exactly match yours. The most recent was in October 2010 I do recall contributions being limited.. If you are under 59 1/2, expect to receive a 1099-R, next tax year pay the 10% penalty, and have it taxed as ordinary income. It's not that big of a deal, assuming the amount is small.

 

[DFA]

Well the amount is about $1000; not much, but just does not seem fair since we do not have a DB plan and I am playing catch-up since I was military for 20 years and there was no TSP/401(k) plan; spent it all until I got out and have been playing the catch-up game to ER.

 

[Dimsumkid]

I believe this is a government restriction over contributions. This is used to ensure the lesser compensated employees contribute to retirement plans on a somewhat equal basis, and Highly Compensated Employees don't get the lions share of the contributions. There's a formula test that needs to be run to calculate what the limit is every year. The company gets penalized if they're not in compliance.

 

[Ronnieboy]

The first company I worked for where I was considered "highly compensated" had a limit on my contributions so that I wouldn't go over, but it was considerably less than what I could or would have put in to max out.

The second company I was/am able to max out every year, even thought I get a note in mid-November stating the company has 'passed' the testing for that year. I believe it has been better with the 2nd company, because they had auto sign-up of 401k for every employee and the employees are paid on average better than the competition.

 

[DblDoc]

This is one of several reasons I work a second job. 2009 contributions were down over $1000 from previous years as my coworkers stopped contributing in large numbers.

DD

 

[RockyMtn]

Yes I had it happen on a couple of occasions. You need to start a one man campaign to get everyone to sign up for the 401k. That brings the averages down and HCE's can contribute more....hopefully up to the max.

 

[Dimsumkid]

I think the bigger issue is when the CEO and really high level execs all contribute. Amazing when you see them max out on 401k contributions in the 1st or 2nd paychecks. And they're the ones who watch it the closest too! It's takes a lot more people on the lower end to balance out the HCE requirements.

 

[Midpack]

That's been in place for a long time, I've gotten money back (unfortunately) several years before, though most years not. Never liked it, but nothing we can do about it...

 

[Texas Proud]

A long time ago where I worked the max for the high earners was 4%... 16% for the rest of us...

I do not think you have to pay the penalty as it was not your choice to withdrawal... but I could be wrong...

The one thing that happened to me was the company where the high earners were limited... I got money back because there was a limit (at least at the time) of the max percentage you could pay... it seems that if you put in 16% and the company matches 8% you exceeded that max...

The company sent me my money and some extra to pay for the 10% penalty tax...

 

[sailor]

Yes, quite common.
And another reason not to file the taxes early.
The cutoff for testing for most plans is March 15th, although a friend of mine needed to amend anyway, when the audit at his place was creatively extended and got a check dated March 15th at the beginning of April.

 

[W2R]

Well the amount is about $1000; not much, but just does not seem fair since we do not have a DB plan and I am playing catch-up since I was military for 20 years and there was no TSP/401(k) plan; spent it all until I got out and have been playing the catch-up game to ER.

It's not terribly fair, is it? But nothing can be done about it, as far as I know.

If I were you, I would invest the money in a taxable account to be used in retirement.

 

[LOL!]

In the old days, one often had to file an amended tax return to have the income taxed in the correct year. They changed the law, so the corrective distribution can be declared as income in the tax year you receive it. The income generally goes on the same line as W2 income. TurboTax et al know what to do with it.

 

[RetirementColdHardTruth]

Yes I remember it happebing to me and I was really upset about it. Seems unfair to stop us from saving for our future just because others choose not too.

 

[Darryl]

Yep, been on the receiving end of those distributions. Usually get a heads up from Payroll in October of what they expect the max to be for HCE. I just look at the trend for the last several years (it is quite stable) and target enough below that to avoid having to deal with the extra paperwork.

 

[soupcxan]

One solution is for the employer to make a baseline contribution for all employees (e.g. low compensated employees get a 3% match even if you contribute 0% to your 401k) along with some other rule changes - this is part of a safe harbor 401k plan.