Overcontribution in 401k due to employer match

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Topic Author
surftheweb
Posts: 18
Joined: Sun Apr 15, 2018 1:03 am

Overcontribution in 401k due to employer match

Post by surftheweb »

I posed this question in a similar thread but figured I would ask it here instead. Can someone confirm if the after-tax contributions and earnings will need to be returned in my case or can the employer simply removed the match portion that caused the limit to be exceeded?

I contributed 19.5k pre-tax and ~31k after-tax. This was all completed by early December. Company match contributions occurred each week of the year with the very last pay check on 12/31 causing the total contributions to exceed 57k by ~$50. The excess contribution was entirely attributed to a company match contribution. Unfortunately, I've already rolled the after-tax portion out to a Roth IRA. I anticipated this in early December and even called them to confirm that the company match contributions would stop when the total reached 57k and they said it would but it did not.
megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Overcontribution in 401k due to employer match

Post by megabad »

Spirit Rider wrote: Mon Jan 04, 2021 12:49 pm EPCRS rules can be quite complex, but from IRS Rev. Proc. 2019-19 (almost 900 pages).

If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for Earnings) and then the unmatched employee’s elective deferrals (adjusted for Earnings)...

Your excess annual additions are considered excess employee after-tax contributions. The excess employee after-tax contributions and earnings (within the 401k) must be returned to you.

It gets a little messy of the excess employee after-tax contributions and earnings have already been rolled out of the 401k. The excess employee after-tax contributions and earnings must be returned to you from the destination along any earnings while in the destination account(s). They were not rollover eligible.
I have basically zero experience with this since I have never rolled the last of the after tax funds out prior to this problem coming up. But I believe the best answer came from SpiritRider in your last thread so I will post that here as a starting point. In short, first I would call the 401k administrator to verify they cannot/will not correct on their end and exactly what tax forms will say. If they cannot correct then I would think that you would need to contact the Roth IRA custodian and solve the ineligible rollover problem. You would then have a possible taxation of associated gains. This is a guess, so the best source is going to be your custodians. Or maybe Alan S or ERISA Stone on this forum.
annu
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Joined: Mon Nov 04, 2019 6:55 pm

Re: Overcontribution in 401k due to employer match

Post by annu »

In same boat. Call your provider, for me after they confirmed how much I had over contributed with, I was told below:

1) Wait from W2, as that will show the contribution
2) Send them a letter, yes a flippin letter with instructions and copy of W2
3) They also gave me address to send it to

And no, they will not automatically do it, you need to do it.
persimmon_tree
Posts: 27
Joined: Tue Oct 08, 2013 8:18 pm

Re: Overcontribution in 401k due to employer match

Post by persimmon_tree »

My experience so far:
1. Didn't realize my after-tax contribution + company matching + pre_tax will overshoot the IRS limit until 1 pay period after.
2. My 401k custodian (Fidelity) capped my total 401k pie (pre_tax + post_tax + matching) at IRS limit.
3. My company's over-match (til end of 2020) goes into a excess amount bucket at Fidelity.
4. Supposedly Fidelity will credit back the excess amount to me some time 2021.
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TierArtz
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Joined: Wed Jan 04, 2017 9:33 pm

Re: Overcontribution in 401k due to employer match

Post by TierArtz »

It happened to me in 2019 and the system basically took care of it automatically.

I just do whatever work my employer assigns to me and find out after the fact if the quantity and timing earned me any "extra" or not. I had perfectly tuned withholding for basic, catch-up, and after-tax (assuming standard pay and matching) and knew my employer shuts off the basic pre-tax and catch-up perfectly at the limits. Anyway, some extra pay in December made me max the first two in the 2nd to last paycheck (figured no biggie they'll true me up), and I learned the hard way that they don't pay attention to shutting off after-tax at the combined limit of all contributions including the current year and true-up matching.

Long story short, I called Fidelity and explained it to them. I forewarned them of the coming true-up. In the end, Fidelity sent me two checks (because they messed up the math) and charged my account a $25.00 fee for the effort.

The 1099R for 2019 showed my after-tax contribution and a total of 12 cents taxable income (almost immediate in-service Roth conversion). I just plugged the numbers into TurboTax. Perhaps there will be a 2020 complication from the two checks received (returned 2019 income), but time will tell.

Now, I hope it proves true that the true-up received in 2020 ($117) really applies to 2019 and not 2020 totals, as I came $82 short of the $63,500 limit, not counting the true-up.

So, if the OP's custodian is Fidelity, he/she might not have to do anything.
Topic Author
surftheweb
Posts: 18
Joined: Sun Apr 15, 2018 1:03 am

Re: Overcontribution in 401k due to employer match

Post by surftheweb »

Thanks for sharing similar experiences so far, the info will be helpful. It sounds like the process can vary alot and is highly dependent on which custodian you have and how they typically handle the overcontribution. My custodian is not Fidelity, so no luck there. I called my custodian today and unfortunately I don't think they are knowledgeable about the process (at least the phone representative). The representative actually mentioned that the overcontribution was not an issue because the tax year ended on 12/29 although the website says otherwise! I really didn't know how to respond to that, but they are referring the issue to the back office for further review.
annu
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Re: Overcontribution in 401k due to employer match

Post by annu »

persimmon_tree wrote: Tue Jan 05, 2021 1:06 am My experience so far:
1. Didn't realize my after-tax contribution + company matching + pre_tax will overshoot the IRS limit until 1 pay period after.
2. My 401k custodian (Fidelity) capped my total 401k pie (pre_tax + post_tax + matching) at IRS limit.
3. My company's over-match (til end of 2020) goes into a excess amount bucket at Fidelity.
4. Supposedly Fidelity will credit back the excess amount to me some time 2021.
So you did not need to send anything to them? Fidelity told me to send them a copy of my w2 and a letter, postal paper letter....
Topic Author
surftheweb
Posts: 18
Joined: Sun Apr 15, 2018 1:03 am

Overcontribution in 401k due to employer match - Help with taxes!

Post by surftheweb »

Well my overcontribution issue has still not been resolved or acknowledged by the 401k plan administrator because apparently they have until June 2021 to return any excess funds to the employee, which they say is typical. So I have a dilemma on what to do about filing taxes by the 5/17 deadline.

Should I go ahead and file as-is and correct later or should I file for an extension, where hopefully all of this will be sorted out by 10/15?

Reminder, the last employer match of the year pushed me over the 57K limit in 2020, but I had already rolled after-tax contributions to a Roth at another custodian. From discussions, I am thinking that the excess Roth funds and earnings will need to be removed back to the 401k, and then returned to me.

Question is what to do about filing taxes since this won't be resolved for awhile? Thanks.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Overcontribution in 401k due to employer match

Post by lakpr »

I would definitely file for an extension
Topic Author
surftheweb
Posts: 18
Joined: Sun Apr 15, 2018 1:03 am

Re: Overcontribution in 401k due to employer match

Post by surftheweb »

lakpr wrote: Fri May 14, 2021 6:37 am I would definitely file for an extension
Thanks, I guess I will go ahead and do the extension this weekend. Hopefully the Roth refund process and tax documentation are not too cumbersome once the final 401k balances are available in June.
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Gui0507
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Re: Overcontribution in 401k due to employer match

Post by Gui0507 »

surftheweb wrote: Mon Jan 04, 2021 7:57 pm I posed this question in a similar thread but figured I would ask it here instead. Can someone confirm if the after-tax contributions and earnings will need to be returned in my case or can the employer simply removed the match portion that caused the limit to be exceeded?

I contributed 19.5k pre-tax and ~31k after-tax. This was all completed by early December. Company match contributions occurred each week of the year with the very last pay check on 12/31 causing the total contributions to exceed 57k by ~$50. The excess contribution was entirely attributed to a company match contribution. Unfortunately, I've already rolled the after-tax portion out to a Roth IRA. I anticipated this in early December and even called them to confirm that the company match contributions would stop when the total reached 57k and they said it would but it did not.
Wait, I am confused by this. I thought you could only contribute 19.5K per year in your 401k regardless of pre-tax/after-tax? My companies 401k plan has both, I only contribute to the pre-tax amount. My understanding is that it maxes at 19.5k regardless of where you invest it in pre/after and not both.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Overcontribution in 401k due to employer match

Post by lakpr »

Gui0507 wrote: Sun May 16, 2021 2:49 pm Wait, I am confused by this. I thought you could only contribute 19.5K per year in your 401k regardless of pre-tax/after-tax? My companies 401k plan has both, I only contribute to the pre-tax amount. My understanding is that it maxes at 19.5k regardless of where you invest it in pre/after and not both.
Coming late to the party, aren't you?

You are confusing between Roth 401k contribution and After tax contribution. The total limit of pretax contribution and Roth 401k contribution is $19.5k ($26k if you are older than 50), yes. But there is a third category of After tax contribution to 401k, where the contribution is made after tax, but the growth is taxable.

Think pretax IRA, Roth IRA and non-deductible IRA as parallels in the IRA world.

Why would someone make a non-deductible contribution to IRA when the growth is taxable as ordinary income, instead of investing in a taxable account where the capital gains taxes are lower?

Because of the potential to convert to Roth IRA immediately, and then the future growth is all tax free.

Ditto in the 401k world. One makes an after-tax contribution to the 401k, then either converts it to Roth 401k immediately within the plan, or rolls it over to an external Roth IRA. The future growth is all tax free. The IRS limits the amount of such after tax contributions; unlike the IRA it is not a specific dollar limit, but the rules say employee pretax + employee Roth + employer match + employee after tax = $58k. The $6500 senior catch-up (which must be pretax or Roth only) is unaffected by this limit and is separate.

Not all 401k plans allow after-tax contributions . You need to read your plan's Summary Plan Description (SPD) document, scan it for words "after tax" or "after-tax", and read the surrounding paragraphs on any hits to make sure that they aren't talking about Roth contributions. It is relatively rare.

Wiki entry for more details:

https://www.bogleheads.org/wiki/After-tax_401(k)
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