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Old 01-24-2020, 09:32 AM   #21
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Well, the first thing that I would ask them to do is to put it in writing. The second thing I would do is to tell them that my research indicates that no IRS rules were violated since my contributions were under the $18k limit and the total contributions were under the $54k limit and ask if they concur with that conclusion. Then I would say that they have created quite a problem for themselves and let them respond. I might also enquire what the penalty is for them violating their plan rules.

If I was in a good mood, I might offer an olive branch that I might be amenable to their proposal as long as they agreed, in writing, to make me whole for taxes, the cost of amending returns, any penalties and interest, loss of ACA subsidies as a result of the increased income and my and legal representation costs.... and if I didn't trust them to uphold their part of the deal I would want an amount sufficient to cover all those costs placed in escrow with my attorney.

If they did as they proposed, would the $20k bonus be income to you in 2017 or 2018 when the bonus was credited to your 401k or in 2020 when you receive it?
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Old 01-24-2020, 09:32 AM   #22
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Yes, the Fidelity issue would be that money that was not qualified went to a tax advantaged IRA rollover. They accepted it based on it coming from a qualified plan. Not fun for the employer to sort out or for the individual involved. Nobody will be happy with the outcome. It is possible they will drop it, but usually not once an attorney is involved, in my long ago experiences.
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Old 01-24-2020, 09:44 AM   #23
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Yes, the Fidelity issue would be that money that was not qualified went to a tax advantaged IRA rollover. They accepted it based on it coming from a qualified plan. Not fun for the employer to sort out or for the individual involved. Nobody will be happy with the outcome. It is possible they will drop it, but usually not once an attorney is involved, in my long ago experiences.
When I spoke to Fidelity about this they told me that they were not the plan advisor on the account. They said if they were the plan advisor they would have to get involved but since they were only hired to do the record keeping they did not want to get involved.

I think the plan advisor is a very small company that just gets paid an annual fee to answer questions about investing from employees. I can't even find their contact information so I'm not sure if they have been involved in this.
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Old 01-24-2020, 09:49 AM   #24
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If they did as they proposed, would the $20k bonus be income to you in 2017 or 2018 when the bonus was credited to your 401k or in 2020 when you receive it?
That's a good question. I'm not sure yet.

About three weeks ago I received a surprise check for around $5K in the mail from them. It was dated December 28th but I did not receive it until January 2. I then received an email a couple of days later letting me know that due to a recent audit I was going to be receiving a disbursement from the 401K because I was deemed a highly compensated executive and there was not enough participation from the lower income employees to allow me to make the full contribution.

What really irritated me is that they knew the check was coming in 2019 but did not mail the check nor notify me of the issue until 2020. So I did not pay the anticipated taxes on the money and now I'm going to be hit with a penalty for underpayment on my California tax returns for 2019.

They did inform me the money would be counted as 2019 income. So I'm guessing that the $20K, if reissued, would likely be 2020 income. But so far they have not said anything.

This was the catalyst for me doing the rollover. I didn't want to have to worry about them doing an audit for the next year and issuing me another last minute surprise check.
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Old 01-24-2020, 09:50 AM   #25
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You might also ask if the auditor recommended any remedial actions and if so, what they were. Often the audit report will just flag the issue and be silent on remedial action but sometimes it will flag the issue and recommend one or more remedial actions... if could be that there are other remedies that they are not pursuing because they are more onerous than getting you to agree to a reversal.
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Old 01-24-2020, 09:53 AM   #26
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You might also ask if the auditor recommended any remedial actions and if so, what they were. Often the audit report will just flag the issue and be silent on remedial action but sometimes it will flag the issue and recommend one or more remedial actions... if could be that there are other remedies that they are not pursuing because they are more onerous than getting you to agree to a reversal.
Got it, will do. The attorney they hired is their labor law attorney. In my only brief conversation with him it became apparent he knows absolutely nothing about 401K plans.
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Old 01-24-2020, 09:54 AM   #27
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Will the employer be sending you a revised 1099?

If that doesn't match your rollover amount that may be a problem?
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Old 01-24-2020, 09:56 AM   #28
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Will the employer be sending you a revised 1099?

If that doesn't match your rollover amount that may be a problem?
I donít see how they could. A 1099 would indicate there was a disbursement of funds. The money is no longer in their account so they have no ability to disburse anything.
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Old 01-24-2020, 09:58 AM   #29
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You might also ask if the auditor recommended any remedial actions and if so, what they were. Often the audit report will just flag the issue and be silent on remedial action but sometimes it will flag the issue and recommend one or more remedial actions... if could be that there are other remedies that they are not pursuing because they are more onerous than getting you to agree to a reversal.
There is a lot of material on this regarding self-correction under IRS remedial correction procedures. Plan compensation errors are the number 1 reported deficiency in plan audits.

Since this was a plan operational error, it appears they may be attempting to correct this under the EPRSC rules, which requires a request to make the plan whole.

I'm not a benefits law attorney, however.
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Old 01-24-2020, 09:59 AM   #30
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I don’t see how they could. A 1099 would indicate there was a disbursement of funds. The money is no longer in their account so they have no ability to disburse anything.
when you rolled it over they must have provided you a 1099

in cases like this a plan sponsor can submit an amended 1099 to show the corrected amount, once the plan is made whole but I'm not sure what happens if you don't pay it back - like I said I'm not a benefits attorney...
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Old 01-24-2020, 10:03 AM   #31
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when you rolled it over they must have provided you a 1099

in cases like this a plan sponsor can submit an amended 1099 to show the corrected amount, once the plan is made whole but I'm not sure what happens if you don't pay it back - like I said I'm not a benefits attorney...
Good point. Since I just rolled it over last week I would assume I will not receive a 1099 on it until early next year. It looks like this could drag on for quite a while.
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Old 01-24-2020, 10:04 AM   #32
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there may be a few threads on this subject on the benefitslink.com forums - lots of benefit professionals post there
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Old 01-24-2020, 11:12 AM   #33
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Fixing this should not have any effect your 2017 taxes. The original $20K bonus never appeared on your W-2 because it was an employer contribution. Even if they have to reclassify that money as wages, it makes no sense for them to reopen their 2017 payroll and issue a corrected W-2 for two years ago. Doing that affects their taxes as well as yours, and nobody's going to want to file amended corporate returns and pay penalties for not having withheld payroll taxes correctly, so I'm betting they won't take this route.

Since it sounds like you only rolled over the problematic money a week ago, which must have been just before they realized there was an issue, then they may be able to "fix" this from their end even if you don't cooperate. For example, the plan administrator could issue two 1099-Rs for 2020 -- one for the amount of money that should have been in the account and was properly rolled over, and one for withdrawing the amount that wasn't supposed to be there ($20K + 2 yrs growth). I'm not sure what happens then. One possibility is that you pay taxes on the $20K+growth and end up with a basis in the IRA; another possibility is that it's treated as an over-contribution to the IRA and you end up owing a 6% penalty for every year you leave that money there. In any case, they do have a stick to hold over you, so refusing to cooperate might not be in your best interest.

Also, if this just happened, and you did a trustee-to-trustee rollover, I'm not sure they can't claw it back. There must be methods for retrieving erroneous payments like this within a fairly short amount of time. Once they have the money back, they can pay it out to you however they like, but the easiest way would be via a 1099-Misc, not a W-2.

One thing to watch out for is that technically the growth on the $20K has to come out of the IRA as well, so they need to give that back to you. They can't just cut you a check for $20K + tax, it has to be $20K + growth + tax.
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Old 01-24-2020, 11:19 AM   #34
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This Q&A from the TTAX forums seems to describe your situation: https://ttlc.intuit.com/community/re...ution/00/44459
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Old 01-24-2020, 11:23 AM   #35
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This Q&A from the TTAX forums seems to describe your situation: https://ttlc.intuit.com/community/re...ution/00/44459
this is not an uncommon issue, unfortunately
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Old 01-24-2020, 11:26 AM   #36
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Tell them very politely that you're very sorry that they are in this situation, but it was not your doing, and you have absolutely no responsibility to them. You acted in good faith, let the company make the necessary accounting adjustments on their side. If their rules were violated, let the accounting person who messed up take the fall. Again, not your problem.
sorry but qualified plan corrections dont' work that way

this isn't an accounting issue, it's a plan qualification issue
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Old 01-24-2020, 11:30 AM   #37
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OP, can you elaborate on the $54k limit mentioned in the OP?
that's the 415c limit for that plan year - basically the sum of all employee and employer contributions for a DC plan can't be greater than that number, but for the post 50 catch up

https://www.irs.gov/retirement-plans...-a-participant
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Old 01-24-2020, 11:51 AM   #38
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Could they spread the $20k over say a decade (treating it as deferred compensation) to minimize any taxes incurred?
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Old 01-24-2020, 11:51 AM   #39
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I received a call from an attorney out of the blue this week. They represent a company which I worked for up until 2017. When I left the company, they contributed a $20K bonus into my 401K as part of my severance package. During a recent audit they determined that the plan does not allow them to provide a bonus into the 401K unless I'm employed there on the final calendar day of the year (which I was not).

My own contributions to the 401K were under the $18K limit, and the total contributions including employer match and bonus were under the $54K limit that was in place in 2017. So as far as I can tell I did not violate any IRS regulation regarding contributions.

Their issue is that they violated their own plan rules. ....
I'm wondering if your interpretation is incorrect.

The $20k bonus was not a matching or profit sharing contribution... it was a bonus as part of your severance and would have been income to you if it hadn't been put into the 401k (right?)... by crediting it to your 401(k) they effectively let you defer it and caused your contributions to exceed the $18k limit so you overcontributed and they are looking for your cooperation in remedying the overcontribution.

If my interpretation above is correct and their mistake resulted in you unknowingly overcontribute for 2017 then it might make fixing it easier... you would withdraw the overcontribution and pay the resulting tax and 6% overcontribution penalties, etc. and it would be a 2020 event. They should make you totally whole including any necessary grossups for taxes, all penalties, tax preparer and legal costs, etc. since it was their mistake.

I'm thinking that the treatment would be akin to an overcontribution to a deductible IRA since you were not taxed on the income.

Quote:
Remove excess after the tax filing deadline—Only a true
excess, not a nondeductible contribution, can be removed after the
deadline. You will remove only the amount of the excess; no
earnings or loss will be calculated. You will owe the IRS 6% excise
penalty for every year the excess remains in the IRA.
Additionally, you may not deduct the excess amount when filing
your taxes. The excess amount removed will not be taxable if your
aggregate contributions for the year do not exceed the annual
contribution limit. However, if your aggregate contribution limit
for the year exceeded the annual amount, then the excess is
taxable and would be subject to the IRS 10% early distribution
penalty if you are under age 59Ĺ.
https://www08.wellsfargomedia.com/as...tributions.pdf
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Old 01-24-2020, 11:51 AM   #40
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that's the 415c limit for that plan year - basically the sum of all employee and employer contributions for a DC plan can't be greater than that number, but for the post 50 catch up

https://www.irs.gov/retirement-plans...-a-participant
Yeah, I later found it and deleted that post.
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