401k failed non-discrimination test - already rolled over

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PatStephenson
Posts: 3
Joined: Thu Apr 09, 2015 11:42 am

401k failed non-discrimination test - already rolled over

Post by PatStephenson »

I maxed out my 401k last year before leaving my employer, and rolled over the money soon thereafter. All contributions were pretax.

I've just received a form notification that the plan failed non-discrimination tests, they are going to refund some money, and "the check is in the mail". Presumably the check is not really in the mail .. how should I expect them to handle this situation?
Bill M
Posts: 438
Joined: Sun Dec 30, 2012 10:10 pm

Re: 401k failed non-discrimination test - already rolled ove

Post by Bill M »

Its their problem, not yours. But if they send you a refund check, I'd sit on it for a while before cashing it, expecting them to demand its return.
ERISA Stone
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Joined: Tue Jun 24, 2014 8:54 am

Re: 401k failed non-discrimination test - already rolled ove

Post by ERISA Stone »

Bill M wrote:Its their problem, not yours. But if they send you a refund check, I'd sit on it for a while before cashing it, expecting them to demand its return.
This is not correct. It is your problem as well. If you are due a refund and that money was rolled to an IRA, you have funds in your IRA that are not qualified. They will likely attempt to contact you because the financial institution that houses your IRA needs to be notified. I believe that money should be refunded to you, just as it would if it were in your 401k account. And your former employer's liability ends at contacting you/current custodian.

They're not going to send you a refund check. You received a blanket letter that went out to all participants who are due a refund.
Topic Author
PatStephenson
Posts: 3
Joined: Thu Apr 09, 2015 11:42 am

Re: 401k failed non-discrimination test - already rolled ove

Post by PatStephenson »

Thanks for the replies. I don't really expect them to send me money! I suspect they will report to the IRS in some way, but I'm wondering what that should be. They have already issued a 1099-R for the rollover.
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: 401k failed non-discrimination test - already rolled ove

Post by Alan S. »

Pat, you are soon going to receive a corrected 1099R reducing the amount of the direct rollover by the amount of the excess contribution to the plan. That excess amount will be reported on another 1099R coded to show an excess contribution distribution, which of course is not eligible for rollover. Because you received the excess amount in 2014, the excess amount will be taxable income on your 2014 return on line 7 (wages). There is no penalty, just the line 7 taxable income. Refer to IRS Pub 525, p 11 (Excess Contributions).
http://www.irs.gov/pub/irs-pdf/p525.pdf

Due to the prior rollover of these funds, you have an excess IRA contribution which must be corrected as such, as the excess amount will be treated as an excess regular IRA contribution. The excess IRA contribution was also made in 2014, so when you receive the corrective IRA distribution, any earnings will be taxable and subject to penalty in 2014, but the IRA distribution will not otherwise be taxable (you reported that income on line 7.

Given the date, you should file an extension of your 2014 return, but remember to include the amount of tax you think you will owe given the increased taxable income you will have for 2014. If you have already filed, then you will eventually have to file a 1040X.
nekrad
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Joined: Fri Feb 27, 2015 1:33 am

Re: 401k failed non-discrimination test - already rolled ove

Post by nekrad »

This is a timely thread.

I received an email about a HCE excess contribution tonight from a job I left at the end of last year. I've already rolled the money out. I wondered what might happen.

The weird thing was that yesterday I received a letter in the mail about a distribution of 13 cents. I am really hoping that was the excess contribution.
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