Employer messed up 401K & HSA contributions

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epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Employer messed up 401K & HSA contributions

Post by epargnant » Wed Dec 06, 2017 11:01 am

Hello, I am a first time poster but I have learned so much from this forum. Thank you!

My husband's megacorp has mistakenly deposited too much into our HSA & 401K. They paid him under the wrong subsidiary for several paychecks, and now they are trying to fix it. They were apparently planning to remove 3 paychecks worth of contributions to the HSA & 401K, and then re-deposit the same amounts. However, they only managed to deposit more money; they can't figure out how to remove contributions.

This was going to be our first year maxing out our HSA & 401K, so these excess contributions have put us over the federal limit.

The HSA custodian seems happy to keep accepting payments over the limit, so another contribution was deducted from the Nov 30 paycheck. However they did send us an excess contribution removal form. I am going to wait until next year for that in case his company can figure it out.

For the 401K, we got a letter from Vanguard saying we had met the limit and they would no longer be taking anything from our paycheck. In looking at our account, it looks like we've contributed $18,666 for the year, so there is still an excess contribution left.

My main concern is that megacorp will finally get around to withdrawing the mistaken contributions, but not until it is too late for us to contribute to the 401K on the Dec 31 paycheck. I am also concerned about tax penalties.

My questions:

1) Has this happened to you and how did it work out?

1) What if they do not remove the excess 401K & HSA contributions until January? (This has been going on since October so I am not hopeful it will be resolved soon). Will the withdrawn contributions be applicable to 2017, or will we be personally on the hook for the excess 2017 contributions?

2) Should we ask HR/Vanguard to take $3000 out of my husband's last paycheck in case his company does withdraw the misktaken/excess contributions before that date? Or will that just lead to more headaches later if they don't withdraw it?

3) If it is the megacorp removing a contribution, do we have to explain that in our taxes, or just ignore it?

4) If we lose out on the last $3000 in tax-advantaged 401K space (as well as $900 in federal/state taxes), should I open a taxable account and put $2000 in there? We do not have any taxable retirement savings. We already contributed $5500 each to a Roth.

5) Am I correct that we have until tax day 2018 to make sure excess contributions in both accounts are removed?

6) Is there anything else to do now,or do we just wait to see what happens? My husband says he has several paycheck tickets open and has even found some HR people in person to talk to, to no avail yet.

Thank you for your time.

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Fri Dec 29, 2017 3:10 pm

Original poster here again with an update, hoping for a couple replies this time.

My husband's company managed to figure out the HSA for the year, so that is okay.

For the 401K, they took out the excess contributions, and said they would max it out on the Dec. paycheck. However, in looking at the paystub today, they did not take anything out for the 401K, despite us increasing our deferral on Vanguard's site and receiving a confirmation. So, we have lost $3000 in tax advantaged space this year. It has also put us over the limit to receive some tax credits, so we will get a few hundred dollars less in tax credits. Not a huge deal, but overall disappointing. We also need to figure out how to get the employee match for Nov & Dec, but at least that is not time sensitive.

Question: Can employers retroactively contribute to a 401K for a missed deferral, that would count on our 2017 taxes? Or is the tax advantaged space lost forever?

Thank you!

GreenGrowTheDollars
Posts: 351
Joined: Fri Dec 18, 2015 11:09 pm

Re: Employer messed up 401K & HSA contributions

Post by GreenGrowTheDollars » Fri Dec 29, 2017 5:18 pm

We had this happen with an elective 401K deferral two years ago. Employer said, "sorry about that."

Apparently, the rules about making employees whole for mistakes like this were changed, and now companies get a free pass on these kinds of screwups.

Sorry.

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Sat Dec 30, 2017 2:40 pm

Thanks for the reply GreenGrowTheDollars. I guess we just need to let it go & aim to max it out next year!

ERISA Stone
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Re: Employer messed up 401K & HSA contributions

Post by ERISA Stone » Sat Dec 30, 2017 2:46 pm

I don't quite understand what has happened here. You say $18,666. That's over the limit by $666, assuming your husband isn't at least 50.

Can you clarify the $3k number and where it came from?

Also, what will your husband's W-2 say? Will it show $18,666 or $15k?
Last edited by ERISA Stone on Sat Dec 30, 2017 2:53 pm, edited 1 time in total.

lostinjersey
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Re: Employer messed up 401K & HSA contributions

Post by lostinjersey » Sat Dec 30, 2017 2:47 pm

If they don't fix it in 2017 (and technically they still have time) then I think you are in QNEC territory. Here's a link to the IRS website on this topic.

https://www.irs.gov/retirement-plans/fi ... -elections

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celia
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Re: Employer messed up 401K & HSA contributions

Post by celia » Sat Dec 30, 2017 2:59 pm

Why not aim to max the accounts out by September or so next year, so there is time to make corrections if things go wrong? Of course, I realize that may not be compatible with the contribution rules the employer may have set up.

As far as not maxing out the 401K for this year, it is easier for me to look at it philosophically than you. But as long as you get that money back and, if it is taxable, that means you can put it in a taxable account and let it grow there. Then your future RMDs will be less than if the money had stayed in. (I suspect that you will be one of those who decides to do Roth conversions in their early retirement years in order to avoid higher taxes/brackets when you are 70.5 and start Social Security and RMDs.)

If you are eligible for backdoor Roth contributions and have not made them yet, then this is your opportunity to put the returned money into Roth IRAs.

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Sat Dec 30, 2017 8:16 pm

ERISA Stone wrote:
Sat Dec 30, 2017 2:46 pm
I don't quite understand what has happened here. You say $18,666. That's over the limit by $666, assuming your husband isn't at least 50.

Can you clarify the $3k number and where it came from?

Also, what will your husband's W-2 say? Will it show $18,666 or $15k?
Thank you for your reply. I know that my posts are confusing! At first, megacorp messed up by depositing additional money into the 401K when trying to fix prior paychecks (see original post). At that time I was worried about excess contributions (although technically we personally never made them, but megacorp told Vanguard they were our contributions). In the meantime Vanguard automatically stopped accepting contributions so nothing was taken for November.

As of mid-December megacorp reversed the erroneous contributions, so our total contributions went back to our actual, correct contributions of $15K. My husband talked to HR as well as went through the Vanguard site to make sure they would take the remaining $3K out of December's paycheck, but they did not.

So my question is can megacorp fix the December paycheck and add $3K to the 401K in January 2018, but have it count for 2017? We've had so much trouble with them "fixing" paychecks this past year and making a mess of things that we only want to ask them to look into it if we know it's possible. Otherwise they might just make things more complicated!

FYI we are under 50. As of the December 2017 paycheck, the W2 will say we contributed $15K.

Thank you!

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Sat Dec 30, 2017 8:25 pm

celia wrote:
Sat Dec 30, 2017 2:59 pm
Why not aim to max the accounts out by September or so next year, so there is time to make corrections if things go wrong? Of course, I realize that may not be compatible with the contribution rules the employer may have set up.

As far as not maxing out the 401K for this year, it is easier for me to look at it philosophically than you. But as long as you get that money back and, if it is taxable, that means you can put it in a taxable account and let it grow there. Then your future RMDs will be less than if the money had stayed in. (I suspect that you will be one of those who decides to do Roth conversions in their early retirement years in order to avoid higher taxes/brackets when you are 70.5 and start Social Security and RMDs.)

If you are eligible for backdoor Roth contributions and have not made them yet, then this is your opportunity to put the returned money into Roth IRAs.
Thanks for your reply! Yes we need to look into the employer match to see if they "true up" if he contributes to the max early. Hopefully they do!

We've maxed out both Roths for 2017 and have contributions ready for 2018. We have worked hard to max things out for the first time this year and plan to next year too! Perhaps that is why it seems disappointing, not because of the actual money but because it feels our goal has not been met. But you are right- as long as we invest it, even minus taxes, we still met our savings goals.

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Sat Dec 30, 2017 8:40 pm

lostinjersey wrote:
Sat Dec 30, 2017 2:47 pm
If they don't fix it in 2017 (and technically they still have time) then I think you are in QNEC territory. Here's a link to the IRS website on this topic.

https://www.irs.gov/retirement-plans/fi ... -elections
Thanks for your reply LostinJersey. I've been reading about that, but other IRS links seem to indicate that they have relaxed the requirements (as Greengrowthedollars pointed out). It seems that as along as they start taking contributions the next month after a missed deferral, they do not owe us anything except the employee match we missed. But, I have to admit the language is confusing. Maybe it's worth my husband re-opening an HR ticket,
especially if they still have time to fix it as you said (though he is tired of dealing with them and he isn't sure it's worth it!).

https://www.irs.gov/retirement-plans/fi ... -elections

ERISA Stone
Posts: 1480
Joined: Tue Jun 24, 2014 8:54 am

Re: Employer messed up 401K & HSA contributions

Post by ERISA Stone » Sat Dec 30, 2017 9:04 pm

epargnant wrote:
Sat Dec 30, 2017 8:16 pm
ERISA Stone wrote:
Sat Dec 30, 2017 2:46 pm
I don't quite understand what has happened here. You say $18,666. That's over the limit by $666, assuming your husband isn't at least 50.

Can you clarify the $3k number and where it came from?

Also, what will your husband's W-2 say? Will it show $18,666 or $15k?
Thank you for your reply. I know that my posts are confusing! At first, megacorp messed up by depositing additional money into the 401K when trying to fix prior paychecks (see original post). At that time I was worried about excess contributions (although technically we personally never made them, but megacorp told Vanguard they were our contributions). In the meantime Vanguard automatically stopped accepting contributions so nothing was taken for November.

As of mid-December megacorp reversed the erroneous contributions, so our total contributions went back to our actual, correct contributions of $15K. My husband talked to HR as well as went through the Vanguard site to make sure they would take the remaining $3K out of December's paycheck, but they did not.

So my question is can megacorp fix the December paycheck and add $3K to the 401K in January 2018, but have it count for 2017? We've had so much trouble with them "fixing" paychecks this past year and making a mess of things that we only want to ask them to look into it if we know it's possible. Otherwise they might just make things more complicated!

FYI we are under 50. As of the December 2017 paycheck, the W2 will say we contributed $15K.

Thank you!
I'm not quite sure what the solution is here because I've never encountered this fact pattern. I'll caveat and say I'm not 100% sure but I'm inclined to think your husband's employer should make a corrective QNEC. Yes, your husband could've made up the "missed deferrals" but the company messed that up as well. Since he maxes out his contribution, he won't be able to recover the loss in 2018.

epargnant
Posts: 22
Joined: Wed Dec 06, 2017 10:34 am

Re: Employer messed up 401K & HSA contributions

Post by epargnant » Tue Jan 30, 2018 1:08 pm

Thanks for all who replied earlier. As an update, my husband's employer "re-classified" his Nov & Dec paychecks, and deposited the missed 401K contributions into Vanguard last week. They are taking the money for these contributions out of tomorrow's paycheck. The W2 we just got says our 2017 401K contributions are at 18,000. And we talked to Vanguard and they are considering the mid-Jan contribution to be 2017 (I guess that's often the case for a Dec 31 paycheck anyway.) So I guess employers have some leeway in correcting missed contributions even in a new tax year, and it doesn't matter that technically the money was taken out of January's paycheck (as a "Misc re-payment"), since they re-classified the Nov/Dec paychecks.

Just wanted to update in case someone ever has the same thing happen.

Thank you.

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