401K Employer Over Contribution Dilemma

pb4uski said:
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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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.
 
Will the employer be sending you a revised 1099?

If that doesn't match your rollover amount that may be a problem?
 
Big_Hitter said:
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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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.
 
pb4uski said:
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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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.
 
Ready said:
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.
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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...
 
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Big_Hitter said:
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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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.
 
there may be a few threads on this subject on the benefitslink.com forums - lots of benefit professionals post there
 
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.
 
njhowie said:
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.
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sorry but qualified plan corrections dont' work that way

this isn't an accounting issue, it's a plan qualification issue
 
Could they spread the $20k over say a decade (treating it as deferred compensation) to minimize any taxes incurred?
 
Ready said:
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. ....
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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.

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 59½.
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https://www08.wellsfargomedia.com/a...planning/correct-excess-IRA-contributions.pdf
 
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pb4uski said:
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/a...planning/correct-excess-IRA-contributions.pdf
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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.
 
Big_Hitter said:
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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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.
 
Ready said:
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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Ready said:
I believe the $20K was a qualified non-elective contribution.
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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.
 
njhowie said:
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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+100
 
pb4uski said:
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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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.
 
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.
 
N02L84ER said:
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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Great catch! Yes, I did retire and have not worked since leaving that job. Could that be enough to put an end to this?
 
Ready said:
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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Looks like it to me. If so, then I think you should be compensated for finding them a way out.
 
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I guess if they can reclassify it as "retirement" rather than a "termination/severance" that might do the trick!
 
Tiger8693 said:
I guess if they can reclassify it as "retirement" rather than a "termination/severance" that might do the trick!
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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.
 
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