Options for HCE 401k refund check

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Options for HCE 401k refund check

Postby slug » Mon Apr 11, 2011 2:20 pm

I got a check for about $4k this year due to my employer's failure on the HCE tests. My question is can I avoid this being a taxable event by rolling over this check into an IRA within a certain time period. Does anyone have any documentation to suggest this is a possibility?

Many thanks.
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Postby paulob » Mon Apr 11, 2011 3:14 pm

My understanding is that you would have to approach these as separate events. E.G. you have nothing to rollover as the check is a return of contributions, and not a distribution that can be rolled over.

You could made a deductible contribution to offset the income effect of the check rec'd, but if you are a HCE, your ability to meet the IRA deductible tests is likely remote.
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Postby BruceM » Mon Apr 11, 2011 3:22 pm

Agree
This is simply a % of your salary you deferred into your employer's 401(k) being returned to you, as though you had never contributed it...plus probably a small amount of earnings.

You should see if you can talk your employer into modifying the current 401(k) into either a Safe Harbor or Qualified Auto Contribution Arrangement style 401(k)....then you wouldn't have these non-discrimination testing issues :-)

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Postby slug » Mon Apr 11, 2011 4:27 pm

Thank you for the replies. I was afraid of that.

BTW my new employer has apparently failed for the last 8 years. They are just now starting to consider methods to fix the problem.
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Bummer

Postby WhiskeyJ » Fri May 27, 2011 9:33 pm

The company I work for was acquired last year. We used to be able to get to about $13K in 401(k) contributions before we failed the discrimination test. I just got a notice that the mid-year calculation shows that $6500 is likely to be the maximum contribution for HCEs. Unfortunately the combined companies have 20,000+ employees so I doubt there is much chance of changing this.

I had contributed $9K already, so I immediately stopped. I assume they wait until after the end of the year to do the refund, correct?
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Postby leonard » Fri May 27, 2011 9:55 pm

slug wrote:Thank you for the replies. I was afraid of that.

BTW my new employer has apparently failed for the last 8 years. They are just now starting to consider methods to fix the problem.


Considering any search of "401k" on bing or google will return the words "safe harbor" and solve this problem in less than 3 minutes, I seriously would reconsider my new employers viability as an ongoing concern. I am not kidding - I would keep looking while the resume is current and you are already in that mode.
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Re: Bummer

Postby Alan S. » Sat May 28, 2011 12:40 am

WhiskeyJ wrote:The company I work for was acquired last year. We used to be able to get to about $13K in 401(k) contributions before we failed the discrimination test. I just got a notice that the mid-year calculation shows that $6500 is likely to be the maximum contribution for HCEs. Unfortunately the combined companies have 20,000+ employees so I doubt there is much chance of changing this.

I had contributed $9K already, so I immediately stopped. I assume they wait until after the end of the year to do the refund, correct?


Yes, they normally issue the return of your excess contributions just prior to next April 15th along with allocated earnings on them. You cannot roll them over and will have to add the distribution to your income in the year you receive the check, which is probably going to be next year. There is no penalty.

But there might be another solution. If you want to have the amount recharacterized as after tax contributions to the plan, many plans will offer that option. You are still taxed on these, but not on the earnings but will have more money in the plan. Check into that option.

As usual, notices you get from the plan are plan specific and trump any comments made here.
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