"Reversing" 401k to get match at new job?

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Ancal
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"Reversing" 401k to get match at new job?

Post by Ancal » Wed May 30, 2018 11:26 am

Strange question here – knowing I was going to leave my job earlier this year, I maxed out my 401k early (no company match) in order to get the entire amount in for the year.

Now, unexpectedly, I have a job offer from a company that offers a 4% match...but obviously, I've already contributed the maximum to a 401k already.

Does anyone know if there's a way to "undo" the former 401k contributions so that I can take advantage of the new company's match?

stimulacra
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Re: "Reversing" 401k to get match at new job?

Post by stimulacra » Wed May 30, 2018 11:30 am

Does the new employer offer a Roth 401k? I might go that route for the remainder of 2018 if they do.

sailaway
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Re: "Reversing" 401k to get match at new job?

Post by sailaway » Wed May 30, 2018 11:33 am

stimulacra wrote:
Wed May 30, 2018 11:30 am
Does the new employer offer a Roth 401k? I might go that route for the remainder of 2018 if they do.
The same limit still applies.

However, it might be worth asking if they match after tax contributions.

ThankYouJack
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Re: "Reversing" 401k to get match at new job?

Post by ThankYouJack » Wed May 30, 2018 11:35 am

Ancal wrote:
Wed May 30, 2018 11:26 am
Strange question here – knowing I was going to leave my job earlier this year, I maxed out my 401k early (no company match) in order to get the entire amount in for the year.

Now, unexpectedly, I have a job offer from a company that offers a 4% match...but obviously, I've already contributed the maximum to a 401k already.

Does anyone know if there's a way to "undo" the former 401k contributions so that I can take advantage of the new company's match?
My guess is no but you could call the investment company that that the contributions were made through to double check.

cherijoh
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Re: "Reversing" 401k to get match at new job?

Post by cherijoh » Wed May 30, 2018 11:49 am

Here's a link to a thread on the same topic from last week.

Ancal
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Re: "Reversing" 401k to get match at new job?

Post by Ancal » Wed May 30, 2018 12:00 pm

Thanks for the advice! I'll check upon the after-tax matching possibility.

cherijoh - i think the situation is slightly different from that in the other thread (that person isn't eligible for the Roth 401k until 2019).

JoeRetire
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Re: "Reversing" 401k to get match at new job?

Post by JoeRetire » Wed May 30, 2018 12:10 pm

Ancal wrote:
Wed May 30, 2018 11:26 am
Does anyone know if there's a way to "undo" the former 401k contributions so that I can take advantage of the new company's match?
Talk to the Plan Sponsor (at your company) to find out if your plan allows this. (Obviously don't mention that you have found a new job unless you have already left the old one). Most won't permit this, although some do.

Alternatively, consider this: https://www.marketwatch.com/story/can-y ... 2014-10-17

Spirit Rider
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Re: "Reversing" 401k to get match at new job?

Post by Spirit Rider » Wed May 30, 2018 12:26 pm

You can not "undo" 401k contributions, but you can remove excess contributions and their earnings after the end of the year. Typically when you have received your W-2s. The IRS allows but does not require a 401k plan to remove excess contributions and earnings prior to 04/15.

The problem is that many plans will only with do this for the plan contributions that actually caused the excess contributions. This means that your former employer may or may not return the excess contributions and earnings caused by contributions at the latter employer.

After you have left the first company or at least given notice, you could inquirer if they would remove excess contributions and earnings after the end of the year if you were no longer employed there. If the answer is no. There is no point in contributing to the second employer.

Not only will all contributions and taxable earnings have to be returned, but any employer contributions on those contributions will also be forfeited.

seawolf21
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Re: "Reversing" 401k to get match at new job?

Post by seawolf21 » Wed May 30, 2018 4:04 pm

Spirit Rider wrote:
Wed May 30, 2018 12:26 pm
You can not "undo" 401k contributions, but you can remove excess contributions and their earnings after the end of the year. Typically when you have received your W-2s. The IRS allows but does not require a 401k plan to remove excess contributions and earnings prior to 04/15.

The problem is that many plans will only with do this for the plan contributions that actually caused the excess contributions. This means that your former employer may or may not return the excess contributions and earnings caused by contributions at the latter employer.

After you have left the first company or at least given notice, you could inquirer if they would remove excess contributions and earnings after the end of the year if you were no longer employed there. If the answer is no. There is no point in contributing to the second employer.

Not only will all contributions and taxable earnings have to be returned, but any employer contributions on those contributions will also be forfeited.
While the first employer may decline to withdrawal excess the new employer is obligated too. There might be a chance the contribution is removed but the match stays....especially if payroll determines the match based on payroll contribution and is not even aware the custodian returned the excess.

Ancal
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Re: "Reversing" 401k to get match at new job?

Post by Ancal » Wed May 30, 2018 5:57 pm

Thanks, this is all good advice.

My inclination is to let it lie and kick up contributions next year. 4% of $18,500 is $740 – not nothing but possibly not worth wading into tax/contribution grey areas + dealing with bureaucracy.

amitb00
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Re: "Reversing" 401k to get match at new job?

Post by amitb00 » Wed May 30, 2018 6:09 pm

Generally 4% is 4% of salary and not of 18500. This does not mean you should contribute more than what is permissible

HornedToad
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Re: "Reversing" 401k to get match at new job?

Post by HornedToad » Wed May 30, 2018 6:22 pm

This doesn't help you now, but if looking at switching jobs in the future then it's worthwhile to lower the 401k contribution to the company match and not max out early in the year in order to avoid this problem.

Spirit Rider
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Re: "Reversing" 401k to get match at new job?

Post by Spirit Rider » Wed May 30, 2018 7:39 pm

seawolf21 wrote:
Wed May 30, 2018 4:04 pm
While the first employer may decline to withdrawal excess the new employer is obligated too. There might be a chance the contribution is removed but the match stays....especially if payroll determines the match based on payroll contribution and is not even aware the custodian returned the excess.
No, the new employer is most definitely not obligated to return excess contributions. IRS regulations allow, but do not require a plan to return excess contributions.

No, there is no chance that the match stays. IRS regulations require that any match on returned excess contributions must be forfeited. The 401k plan administrator is the one who you request the return of the excess contributions from. They most certainly know that there is a match involved. It would be a serious plan error for them to not forfeit the match.

ne2ca28
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Re: "Reversing" 401k to get match at new job?

Post by ne2ca28 » Wed May 30, 2018 7:52 pm

Ancal wrote:
Wed May 30, 2018 5:57 pm
Thanks, this is all good advice.

My inclination is to let it lie and kick up contributions next year. 4% of $18,500 is $740 – not nothing but possibly not worth wading into tax/contribution grey areas + dealing with bureaucracy.
The match percentage is typically based on your salary, not the 401k contribution max. If your salary is $100k, you contribute 4% ($4,000) and the 4% match is also $4,000 for a year. If you contribute 18.5% ($18,500), they still contribute 4% for $4,000 match.

**I just saw that someone else mentioned this, but I'm sending it anyway! :beer

seawolf21
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Re: "Reversing" 401k to get match at new job?

Post by seawolf21 » Wed May 30, 2018 9:44 pm

To answer Ancal's original question, it looks you can undo first employer contribution but really to the amount of the excess as per 402(g)(2)(A)(i)
Spirit Rider wrote:
Wed May 30, 2018 7:39 pm
seawolf21 wrote:
Wed May 30, 2018 4:04 pm
While the first employer may decline to withdrawal excess the new employer is obligated too. There might be a chance the contribution is removed but the match stays....especially if payroll determines the match based on payroll contribution and is not even aware the custodian returned the excess.
No, the new employer is most definitely not obligated to return excess contributions. IRS regulations allow, but do not require a plan to return excess contributions.

No, there is no chance that the match stays. IRS regulations require that any match on returned excess contributions must be forfeited. The 401k plan administrator is the one who you request the return of the excess contributions from. They most certainly know that there is a match involved. It would be a serious plan error for them to not forfeit the match.
Regulation is one thing but In practice, IRS expects the excess contribution to be returned.
https://www.irs.gov/retirement-plans/pl ... the-limits

Spirit Rider
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Re: "Reversing" 401k to get match at new job?

Post by Spirit Rider » Wed May 30, 2018 11:47 pm

seawolf21 wrote:
Wed May 30, 2018 9:44 pm
Regulation is one thing but In practice, IRS expects the excess contribution to be returned.
https://www.irs.gov/retirement-plans/pl ... the-limits
It might help if the link you provided actually supports your contention, which it does not.

"If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions."

seawolf21
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Re: "Reversing" 401k to get match at new job?

Post by seawolf21 » Thu May 31, 2018 9:26 am

Spirit Rider wrote:
Wed May 30, 2018 11:47 pm
seawolf21 wrote:
Wed May 30, 2018 9:44 pm
Regulation is one thing but In practice, IRS expects the excess contribution to be returned.
https://www.irs.gov/retirement-plans/pl ... the-limits
It might help if the link you provided actually supports your contention, which it does not.

"If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions."
What happens to the plan’s ability remain as a qualified plan if they don’t distribute the excess?

2cents2
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Re: "Reversing" 401k to get match at new job?

Post by 2cents2 » Thu May 31, 2018 10:31 am

Just piggy backing off what has been previously suggested--check and see if your new plan matches after tax contributions and also check and see if they allow in service rollovers of after tax contributions.

DH was in a similar situation last year at this time. He went to work for a new company after maxing out his regular tax deferred contributions at his previous job.

The new job wanted to know how much he contributed to his 401k for 2017. This info was entered into their payroll system and prevented DH from making any more regular tax deferred contributions for 2017. DH was able to get his match by making after tax contributions (and they also allowed in service rollovers of after tax contributions which was pretty neat.)

ThisTimeItsDifferent
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Re: "Reversing" 401k to get match at new job?

Post by ThisTimeItsDifferent » Thu May 31, 2018 10:45 am

Spirit Rider wrote:
Wed May 30, 2018 11:47 pm
seawolf21 wrote:
Wed May 30, 2018 9:44 pm
Regulation is one thing but In practice, IRS expects the excess contribution to be returned.
https://www.irs.gov/retirement-plans/pl ... the-limits
It might help if the link you provided actually supports your contention, which it does not.

"If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions."
It then states:
The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).
but I don't know what plans actually do.

Ancal
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Re: "Reversing" 401k to get match at new job?

Post by Ancal » Thu May 31, 2018 2:26 pm

amitb00 wrote:
Wed May 30, 2018 6:09 pm
Generally 4% is 4% of salary and not of 18500. This does not mean you should contribute more than what is permissible
:oops: Thanks! Soooo obvious but totally went over my head.

2cents2 – thanks! Great information.

Spirit Rider
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Re: "Reversing" 401k to get match at new job?

Post by Spirit Rider » Thu May 31, 2018 3:15 pm

seawolf21 wrote:
Thu May 31, 2018 9:26 am
What happens to the plan’s ability remain as a qualified plan if they don’t distribute the excess?
The only time excess employee elective contributions are a plan error risking disqualification is when a plan fails to limit the contributions to the 402g limit (2018 = $18,500) to solely that plan.

When the excess contribution as in the OP's situation is due to total contributions across two or more plans, this is a participant error and not a plan error of any of the participant's plans.

As I said earlier, IRS regulations allow, but do not require a plan in this situation to return excess contributions and earnings.

Most plans where you are currently employed at the end of the year, will return the excess contributions and earnings that occurred under their plan.

Some plans where you were previously employed, will return excess contributions and earnings that occurred under subsequent plan(s), but many will not.

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