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Old 01-24-2020, 06:20 PM   #41
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Originally Posted by pb4uski View Post
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.



https://www08.wellsfargomedia.com/as...tributions.pdf
I believe the $20K was a qualified non-elective contribution. I pulled the relevant section in the plan that covers this:

5. Discretionary Nonelective Contributions
a. Ratio of Compensation Formula
Nonelective contributions, if any, made to the Plan by your Employer shall be allocated to your Account based upon the ratio that your Compensation bears to the Compensation of all eligible employees within the group of eligible employees to which you belong. Each employee will be considered his or her own group.
For additional information regarding the computation of this benefit, please contact the Plan Administrator.
6. Other Contributions and Limitations
a. Qualified Nonelective Contributions
Your Employer may designate all or a portion of any nonelective contributions for a Plan Year as “qualified nonelective contributions” and allocate them to certain Non-Highly Compensated Employees to help the Plan pass one or more annually required Internal Revenue Code non-discrimination test(s). You will be 100% vested in these contributions and may not request a hardship withdrawal of these contributions.
b. Additional Nonelective Contributions
Your Employer may be required to make a flat percentage Nonelective contribution to you if you are not a Highly Compensated Employee due to non-discrimination testing.
c. Limit on Contributions
Federal law requires that amounts contributed by you and on your behalf by your Employer for a given limitation year generally may not exceed the lesser of:
$54,000 (or such amount as may be prescribed by the Secretary of the Treasury); or 100.00% of your annual compensation.
Your Employer may make discretionary nonelective contributions in an amount to be determined by the Board of Directors for each Plan Year. You must complete at least 1,000 hours of service during the Plan Year and be employed as of the last day of the Plan Year to be eligible to receive any nonelective contributions that may be made for that Plan Year. You do not need to satisfy this requirement if you die (including death while performing Qualified Military Service),
become disabled or retire during the Plan Year.
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Old 01-24-2020, 06:35 PM   #42
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Originally Posted by Big_Hitter View Post
sorry but qualified plan corrections dont' work that way

this isn't an accounting issue, it's a plan qualification issue
This is what I’m still trying to understand. My total 401K compensation did not exceed $54K. My individual contributions were less than $18,000. So no IRS rule was broken regarding excess contributions.

The fact that the company intended to pay me $20K is not in dispute. So it was not an overpayment to me personally.

So the entire issue seems to revolve around an unqualified employer contribution, with the sole reason it was unqualified being an employer directed limitation on who is eligible to receive bonuses into the plan. Had that sentence not been in the plan we would have no issue here.

So what is the easiest path to resolve this? Amend the plan? Let them pay a penalty? Give them back the money and have them reissue it as payroll and gross it up for taxes?

When I spoke to the attorney he had no idea the money had been rolled over, so he was calling to request my approval to remove the money from the 401K and reissue it as payroll.

I have not heard back from him since informing him that the money is no longer in the plan, so I have no idea what their next response is going to be.

I did ask Fidelity if there is any possibility that my former employer could claw back the money and they assured me that is not possible.
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Old 01-24-2020, 06:58 PM   #43
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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. ....
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I believe the $20K was a qualified non-elective contribution.
That is what was confusing... in the OP you say that the $20k was a "bonus". Usually a bonus is payable to the employee but the employee can elect to have it deferred subject to contribution limits. While you were an employee could you have elected to receive the bonus or was it required that the bonus be credited to the 401k? Did they credit the bonus into the 401k in 2016 and prior years?

I can see where a profit sharing distribution might be only credited to the 401k rather than paid in cash, but not a bonus... unless what you call a bonus is really a profit sharing distribution.

If it was a profit sharing distribution and was paid into your 401k in prior years and they did that in your last year then it would be hard to characterize it as an overcontribution and it would seem that it is their problem rather than yours.
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Old 01-24-2020, 07:01 PM   #44
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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.

Simply do not cooperate with them and the next time they call, tell them to please not call you again and any correspondence must be in writing..."So I can give it to my attorney". If they violated their own rules and messed up in your favor, that is their problem. Coming back two or three years later, after you no longer work for them is not acceptable!

Seriously, what are they going to do? They can't go and take the money from the account at Fidelity. Are they going to take you to court and sue you? Very doubtful. They'll be laughed out of the court room.

Tell them if they wish to pursue the matter, going forward they are going to have to handle it through your attorney.

You owe them nothing - it's your money.
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Old 01-24-2020, 07:21 PM   #45
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Originally Posted by pb4uski View Post
That is what was confusing... in the OP you say that the $20k was a "bonus". Usually a bonus is payable to the employee but the employee can elect to have it deferred subject to contribution limits. While you were an employee could you have elected to receive the bonus or was it required that the bonus be credited to the 401k? Did they credit the bonus into the 401k in 2016 and prior years?

I can see where a profit sharing distribution might be only credited to the 401k rather than paid in cash, but not a bonus... unless what you call a bonus is really a profit sharing distribution.

If it was a profit sharing distribution and was paid into your 401k in prior years and they did that in your last year then it would be hard to characterize it as an overcontribution and it would seem that it is their problem rather than yours.
It was classified as a bonus. However, in reality it was severance. I had not previously received a bonus from this company. This was the first time.

When I was separating from the company I was offered the $20K in return for signing a mutual release of liability. So I would say it was clearly intended to be a severance payment.

When the company was getting ready to issue the payment, the HR director called me up and asked me if I would like to have the $20K deposited in to my 401K as a bonus. It was not something I requested nor gave any thought to, but since they offered to do it, I said “sure, that sounds great”. I just assumed they knew what they were doing since they were the ones that offered it to me. I never personally requested it.
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Old 01-24-2020, 08:14 PM   #46
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Did you retire during 2017? The last line of post #41 indicates that is an exception to the "be employed the last day of the year" rule.
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Old 01-24-2020, 08:16 PM   #47
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Did you retire during 2017? The last line of post #41 indicates that is an exception to the "be employed the last day of the year" rule.
Great catch! Yes, I did retire and have not worked since leaving that job. Could that be enough to put an end to this?
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Old 01-24-2020, 09:17 PM   #48
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Great catch! Yes, I did retire and have not worked since leaving that job. Could that be enough to put an end to this?
Looks like it to me. If so, then I think you should be compensated for finding them a way out.
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Old 01-25-2020, 07:34 AM   #49
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I guess if they can reclassify it as "retirement" rather than a "termination/severance" that might do the trick!
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Old 01-25-2020, 07:59 AM   #50
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I guess if they can reclassify it as "retirement" rather than a "termination/severance" that might do the trick!
Of course, if OP officially put in notice and retired, then there would be no severance. As far as the company is concerned, OP was terminated. Whether OP decided to look for work, or just call it a career, is none of their concern.

Then again, if reclassification gets everyone off the hook, it could be the way to go.

OP, were there any retiree benefits that you claimed upon leaving? Retiree medical, for instance. If so, it might make it easier to make the case.
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Old 01-25-2020, 08:10 AM   #51
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Of course, if OP officially put in notice and retired, then there would be no severance. As far as the company is concerned, OP was terminated. Whether OP decided to look for work, or just call it a career, is none of their concern.

Then again, if reclassification gets everyone off the hook, it could be the way to go.

OP, were there any retiree benefits that you claimed upon leaving? Retiree medical, for instance. If so, it might make it easier to make the case.
No, it was a termination. The position was eliminated. There were no retirement benefits.

But if I simply take the last sentence and interpret it literally as it was written without getting into what my or my employer’s intent was, I did retire. So I think a good argument could be made that I’m not required to meet the end of year employment condition.
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Old 01-25-2020, 08:40 AM   #52
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what is the definition of "retirement" in the plan document?

typically this is an age and/or service condition

you can't just argue "peace out, hey I retired" it has to satisfy the definition in the plan document
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Old 01-25-2020, 08:50 AM   #53
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what is the definition of "retirement" in the plan document?

typically this is an age and/or service condition

you can't just argue "peace out, hey I retired" it has to satisfy the definition in the plan document
I do not see a definition of the term retirement in the plan. This is the closest paragraph:

3. Retirement
If you are an Employee of your Employer or a Related Employer at the time you attain your normal retirement age of 65.00, your Account balance will automatically become 100% vested.

So it does establish a “normal retirement age” of 65. I’m still in my 50’s so I did not achieve their definition of normal retirement age. But I don’t see anything in the document preventing someone from retiring early and receiving any lesser benefits.

But I get the fact that it’s a little bit of a stretch to say I retired, given that my separation was their decision.
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Old 01-25-2020, 08:52 AM   #54
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yes but if you terminated after satisfying the age and service conditions for retirement you are deemed to have "retired" under the plan - this may not be in the SPD; you may have to request a copy of the actual plan document.
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Old 01-25-2020, 08:54 AM   #55
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One thought that has crossed my mind about all of this is that while a bonus is eligible to be deposited into a 401K, a severance payment is not. And so while they paid me the $20K as a bonus, there is a separation agreement offering me severance in return for a release of liability.

If the auditors were able to review that letter they would see that the $20K payment was clearly not a bonus and may make the argument that calling it a bonus for the purpose of directing it into the 401K was done fraudulently.

If that is the case, the issue could be more serious for the company. It wasn’t my request to do this so I don’t think I have any liability here, but it could taint my ability to keep the money in the IRA.
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Old 01-25-2020, 08:55 AM   #56
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yes but if you terminated after satisfying the age and service conditions for retirement you are deemed to have "retired" under the plan - this may not be in the SPD; you may have to request a copy of the actual plan document.
I’m reviewing a 20 page agreement titled “Summary Plan Description”. Do you think there is a longer document with more detail?
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Old 01-25-2020, 08:56 AM   #57
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I’m reviewing a 20 page agreement titled “Summary Plan Description”. Do you think there is a longer document with more detail?
yes, there has to be and the plan administrator has to give you a copy of it if you ask for it

plan documents are legal documents are are much longer than 20 pages
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Old 01-25-2020, 08:58 AM   #58
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Yeah, the retirement definition might be a glitch... even though I left employ to retire (no longer work), technically I just quit since I didn't have the combination of age and service sufficient to retire.
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Old 01-25-2020, 09:00 AM   #59
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what is the definition of "retirement" in the plan document?

typically this is an age and/or service condition

you can't just argue "peace out, hey I retired" it has to satisfy the definition in the plan document
Yes, this is exactly what I was going to say. I have money in two plans that I can't collect yet because I don't meet their definitions of "retired" even though I'm never planning to work for money again.

I also don't think they're going to be able to say this was a "qualified non-elective contribution". You said earlier that you were an HCE and they sent you back part of a prior year's contribution. According to the language you posted, qualified non-elective contributions are limited to non-HCEs and they're only for the purpose of allowing the plan to pass the non-discrimination testing. A severance payment to an HCE who elected to have it paid into the plan doesn't meet those criteria.
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Old 01-25-2020, 09:05 AM   #60
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I will ask for a full copy of the plan next time I hear from the attorney.

This is a very small company (200 employees). There are no retirement benefits being offered to retirees. There is nothing in the document entitling someone to any benefits based on number of years of service or age. There is a one year vesting period for the match, but that’s about it.
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