401k non-discrimination test

[JoshTrent]

So my employer sent me a nice letter saying that they failed the 401k non-discrimination test. Apparently I am an HCE, so I will be refunded 85% of my 2012 employer match - a taxable distro for 2013.

Has anyone else had to deal with this? Will I be penalized (more than the income tax withholding)?

I have read some articles about this.. and I am fairly upset about the whole thing.

TIA

 

[REattempt]

Josh,

You will not be "penalized." There is no penalties, unless you decide not to include the returned funds in your income. You will have to, however, pay taxes on the amount that was returned to you.

From a tax perspective it will be as if you never deposited the money into the 401K in the first place.

Hope this helps. Not a big issue, may be frustrating, but 'dems da rules.

 

[jwkde]

I had to deal with this almost every year until the last 2 years before FIRE but never 85%. Usually just a$1000-$1500.

My last two years the company switched to a "safe harbor" plan and the discrimination test did not apply (or something)

It is a pain if you manage your witholding closely (like I did) but there is no penatly involved

 

[Texas Proud]

I am really surprised that they refunded 85%....

What kind of company do you work? How many people? Is the company trying to get people to sign? Is there matching to encourage it?


As long as the plan does not have lower paid employees contributing, you will be in this situation... and with an 85% return, you look like you will be there for a LONG time....

In my first job, they had a problem with the plan.... so they decided to match dollar for dollar to 12%.... it still took them a few years to get the plan back into compliance... (which happened just before it went under)....

 

[JoshTrent]

Thanks for the replies.

Some background.. the company I work for is privately owned. There are roughly 1800 employees, of which 1500 are hourly @ less than $35k a year. Overall I would be in the top 1.5% pay-wise. Among the hourly employees, there is fairly significant turnover.

The company's plan matches 50% up to a max 3% match. There is auto enroll at 90 days, and it vests 20% a year.

I guess I will just live with it.. I have been told that the distribution will be for the 2013 tax year, so it won't affect the return that I submitted for 2012. I will just get a heads start on this year's Roth contribution.

Thanks to all!

 

[Mariez]

Same Thing Happened to Me

I received a check for the amount returned and it had Federal taxes taken out. The taxes you now paid will be claimed in 2013. It wasn't too bad.

 

[DFA]

Had the same thing happen for several years now, no penalty, just need to claim it on 2013 taxes.

 

[lemming]

Introduce your company to the concept of safe harbor. I believe they have to match 100% of first 3% and 50% of next 2%. And do an automatic entry for all-make them opt out.

There is another formula for safe harbor but I've forgotten-no one ever picked that one.

 

[JoshTrent]

Introduce your company to the concept of safe harbor. I believe they have to match 100% of first 3% and 50% of next 2%. And do an automatic entry for all-make them opt out.

There is another formula for safe harbor but I've forgotten-no one ever picked that one.

Thanks.. I thought about that. Introducing them to Safe Harbor and actually having them change the plan are two different things. I can't seem to come up with a good analogy, but pushing a boulder uphill comes to mind.

 

[EvrClrx311]

Same thing happened here 2 years ago. My company (600 employees - median salary about 175K) had a GREAT 401k putting aside 20% more than base pay into our 401k without any contribution on our part. A couple years ago we were bought by a large engineering firm (20,000 employees - median salary about $60K). They only do a 3% match, which is a huge disparity compared to ours.

Apparently we didn't pass this IRS test, because our 600 employees bring the average way up on retirement benefits. So they had to adjust things to fit the law. To do so they reduced the automatic contribution to 9.5% and created a 6 to 5 matching. Essentially, you can still get the 20% but now you have to contribute 6% to get 14.5% from the company. Amounted to a 5.5% paycut through benefits.

I guess this is the IRS trying to reduce the ability of Executive level employees from taking advantage of 401k harbors for tax advantages. Sucks when the implementation of something like this affects a company like mine across the board (not just management), when all that has changed is who owns us.

Reminds me a bit of Title 9. Great rule in theory, but in practice it was implemented opposite of how it was intended. It required that schools have an equal male to female sports scholarship ratio. Instead of creating more female sports scholarships [intention], schools just cut their men's programs [implementation] to adhere to the new rule.

 

[JoshTrent]

Reminds me a bit of Title 9. Great rule in theory, but in practice it was implemented opposite of how it was intended. It required that schools have an equal male to female sports scholarship ratio. Instead of creating more female sports scholarships [intention], schools just cut their men's programs [implementation] to adhere to the new rule.

Thanks for the analogy. I appreciate the intention, but the implementation sure does suck..

I just received another email from the HR did, saying that after further testing, I will be receiving more $$'s back. All said and done - I will have been refunded about 30% of last year's total contribution (employee + employer). That just blows..

Would it be safe to assume that everyone above me (pay-wise) had the same thing happen to them?

 

[Texas Proud]

Same thing happened here 2 years ago. My company (600 employees - median salary about 175K) had a GREAT 401k putting aside 20% more than base pay into our 401k without any contribution on our part. A couple years ago we were bought by a large engineering firm (20,000 employees - median salary about $60K). They only do a 3% match, which is a huge disparity compared to ours.

Apparently we didn't pass this IRS test, because our 600 employees bring the average way up on retirement benefits. So they had to adjust things to fit the law. To do so they reduced the automatic contribution to 9.5% and created a 6 to 5 matching. Essentially, you can still get the 20% but now you have to contribute 6% to get 14.5% from the company. Amounted to a 5.5% paycut through benefits.

I guess this is the IRS trying to reduce the ability of Executive level employees from taking advantage of 401k harbors for tax advantages. Sucks when the implementation of something like this affects a company like mine across the board (not just management), when all that has changed is who owns us.

Reminds me a bit of Title 9. Great rule in theory, but in practice it was implemented opposite of how it was intended. It required that schools have an equal male to female sports scholarship ratio. Instead of creating more female sports scholarships [intention], schools just cut their men's programs [implementation] to adhere to the new rule.

I know that from your prospective you got screwed....

But, you went from the best plan I have ever heard of to.... well, the best plan that I have ever heard of except the one you had...

No plan that I know of even comes close....

 

[EvrClrx311]

I know that from your prospective you got screwed....

Yep. It certainly isn't lost on me how generous a benefit it was and still is. I am very fortunate to have started my career with something like this. I'm just hoping it stays where it is for at least another 8 years.