401K Overpayment - Ex Employer Asking for Money Back

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cdogstu99
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401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
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Stinky
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Stinky »

cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
I have no experience with a situation such as this, but —-

Seems like there are two issues here. The first issue is “can the former employer claw back the money”? I’d definitely resist any effort by the employer to do that. They made a mistake in administering their own plan back in 2015 when they vested you at the date of your termination. I’m not sure how they can unring that bell, especially since you’ve rolled into your IRA.

Maybe somebody more knowledgeable can weigh in, but I’m not sure what the employer can do you. Sue you for $6,400 over a mistake they made?

The second issue is “what tax liability do you have”? No matter how the clawback is handled, I wouldn’t think that you would have any taxes due, since the money has been in a tax deferred account the whole time.

I am not a lawyer or an accountant. Hopefully you’ll get more responses.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Stinky wrote: Mon Sep 28, 2020 8:51 am
I have no experience with a situation such as this, but —-

Seems like there are two issues here. The first issue is “can the former employer claw back the money”? I’d definitely resist any effort by the employer to do that. They made a mistake in administering their own plan back in 2015 when they vested you at the date of your termination. I’m not sure how they can unring that bell, especially since you’ve rolled into your IRA.

Maybe somebody more knowledgeable can weigh in, but I’m not sure what the employer can do you. Sue you for $6,400 over a mistake they made?

The second issue is “what tax liability do you have”? No matter how the clawback is handled, I wouldn’t think that you would have any taxes due, since the money has been in a tax deferred account the whole time.

I am not a lawyer or an accountant. Hopefully you’ll get more responses.
That's what I'm thinking, just sort of ignoring the letter for now. However, I am concerned if they do reissue the 1099, that the government is going to see that old disbursement as an early withdrawal and thus I would think that I would get penalized.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by mcraepat9 »

cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
Did you have a signed employment contract with this ex-employer? What did you sign regarding employer contributions/vesting?

When you say "seems like consensus online is that ultimately I would likely owe them the money", what online forum(s) are you referring to?
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

mcraepat9 wrote: Mon Sep 28, 2020 11:05 am
Did you have a signed employment contract with this ex-employer? What did you sign regarding employer contributions/vesting?

When you say "seems like consensus online is that ultimately I would likely owe them the money", what online forum(s) are you referring to?
I honestly have no idea, I just signed whatever the normal paperwork is that you do when you get hired by an employer. I don't have those records.

And by consensus, I found one forum called Benefits Link where I was reading about some similar stories.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by KyleAAA »

My understanding is you probably do owe them the money back. I'm not sure if the fact that it's been 5 years would change that. But in general, if another party makes a mistake that doesn't give you the right to keep the money. Most likely whatever paperwork you signed covers this but even if it doesn't that doesn't let you off the hook. Seems like a question for a lawyer.
Last edited by KyleAAA on Mon Sep 28, 2020 11:22 am, edited 2 times in total.
J295
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by J295 »

As I’m understanding this, you received money in error and your former employer wants it back. Seems to me the appropriate thing is to return it.

You did ask if anyone had experience with this sort of thing. After I transitioned away from full-time at my law firm I remained of counsel for a while and received periodic payments. One of them was too high, in my calculation, so I contacted the managing partner and explained why. He said forget about it, keep the money.

Later near the end of my buyout there had been a change in office managers and the firm sent me a full monthly payment after I had determined only a final partial remained So, I contacted the then managing partner and explained, and refunded the over payment. In this case they didn’t say just keep the money, but instead said yes send back the overpayment.
Last edited by J295 on Mon Sep 28, 2020 11:16 am, edited 1 time in total.
adamthesmythe
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by adamthesmythe »

cdogstu99 wrote: Mon Sep 28, 2020 11:07 am

I honestly have no idea, I just signed whatever the normal paperwork is that you do when you get hired by an employer. I don't have those records.

Send a letter stating that you have received their communication and that you require a detailed explanation of the error, why they think you owe money, and a copy of any agreement or valid employee handbook that shows you have agreed to correct their errors.

Or better still, wait for a second letter before sending this.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by galawdawg »

It would probably be worth your time and money to consult with an attorney. Some posters seem to assume that you actually received an over-payment. Perhaps I misunderstood, but I didn't read that in your post. I read that your former employer alleges that there was an over-payment. Nobody here knows whether your former employer is correct about the alleged over payment.

The first issue would be whether in fact there was an error as to your vested 401k balance. You may be able to determine that by reviewing your 401k statements from 2014-2018 to determine your vested balance. If for some reason you didn't retain those, you could demand that your former employer send you evidence of the alleged over-payment, including duplicates of your 401k statements from 2014-2018. I'd suggest the demand be made in writing and no other communications be made with them. Just respond in writing to the effect that you "demand copies of all documents in support of your position, including but not limited to exact duplicates of my 401k statements from 2014 through 2018 inclusive."

The second issue becomes the remedy. Whether your former employer has the right to attempt to collect the money (litigation would be their only means if the funds are not voluntarily repaid) and whether they would be liable to you for any expenses incurred in "unwinding" the alleged error (such as legal and accountant fees) are questions that would also need to be considered.

A trusted attorney who is experienced in this type of matter would be your best resource.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by WoodSpinner »

OP,

There is also the REAL possibility that this overpayment will trigger significant taxes and penalties and tax filing fees. Any agreement with the company should include them making you whole.

WoodSpinner
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

adamthesmythe wrote: Mon Sep 28, 2020 11:15 am
cdogstu99 wrote: Mon Sep 28, 2020 11:07 am

I honestly have no idea, I just signed whatever the normal paperwork is that you do when you get hired by an employer. I don't have those records.

Send a letter stating that you have received their communication and that you require a detailed explanation of the error, why they think you owe money, and a copy of any agreement or valid employee handbook that shows you have agreed to correct their errors.

Or better still, wait for a second letter before sending this.
Think this is the way I'm leaning...i'll wait for that second letter before I do anything.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

WoodSpinner wrote: Mon Sep 28, 2020 11:55 am OP,

There is also the REAL possibility that this overpayment will trigger significant taxes and penalties and tax filing fees. Any agreement with the company should include them making you whole.

WoodSpinner
Agreed, i guess i'm even on the hook for the $6400 x early withdrawal penalty plus taxes on that amount next year if it isn't resolved. I guess maybe the costs associated could be worth it, if they ultimately never demand the money right?
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Stinky »

Deleted.
Last edited by Stinky on Mon Sep 28, 2020 4:03 pm, edited 1 time in total.
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Thrifty Femme
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Thrifty Femme »

Seems to me they don't want the money back, since they are sending you a 1099. They appear to making sure you pay taxes on the overpayment. If they wanted the money back, I think they would have said so and not send you a 1099. I think any 1099 they send would be for this year, so you shouldn't need to amend a previous tax return. Also from what you wrote, I don't think you haven't distributed anything associated with this matter from your 401k, so a distribution penalty shouldn't be in play.

ETA: I guess they could send you a corrected 1099, which would require you to amend your taxes
Last edited by Thrifty Femme on Mon Sep 28, 2020 4:31 pm, edited 2 times in total.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by JonnyDVM »

WoodSpinner wrote: Mon Sep 28, 2020 11:55 am OP,

There is also the REAL possibility that this overpayment will trigger significant taxes and penalties and tax filing fees. Any agreement with the company should include them making you whole.

WoodSpinner
I had a similar situation with an ex-employer error regarding an HSA for a smaller but still significant amount of money ($700). I called and said I would repay BUT they were going to pay my accountants fee for refiling an amended return and any tax penalties. They put me on hold for a minute then came back and told me not to worry about it. If they can show you that really received the funds erroneously I would pay them back as long as they reimburse you for any the tax consequences and accountant fees. They may tell you to forget it.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by inbox788 »

cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
How did they come up with this $6400? Was this for multiple years or only 2015, the year you left? What month did you leave? Was partial year the main issue? Are these matching funds or other extra company contributed funds?

https://www.shrm.org/resourcesandtools/ ... imits.aspx

There's the $6400 in question, hopefully modest gains, and an administrative headache.

If they take back $6400, does that mean you have less income in 2015 and can adjust your taxes? It's been more than 3 years. How would that work?

Do you get to keep the market gains since 2015? You might need to pay taxes on them. What if you had losses?

Are they going to compensate your for your time, CPA, lawyers, etc.? You might add up all the costs and give them a call and thell them they can have what they ask you, but have to pay you and your accounting and legal expenses with are up to $20k and see what they say. Or just forget about the whole thing.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by stimulacra »

Put them in contact with the administrator of your IRA account. Let them figure it out.

Good luck and spend that growth-appreciated $6,400 with relish and satisfaction when you retire :)
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by lstone19 »

I'm finding a lot of the replies confusing. If I'm reading the original post correctly and haven't missed anything, all the money was rolled into a tIRA. So no tax impact yet. So what would this new 1099-R say? I'm assuming a correction to the original - original said $X, corrected on will say $X-6400. OP said "Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution." How? Going back to the 2018 1040, the 1099-R amount would have been reported on-line 4a (IRAs, pensions, and annuities) but not on 4b (taxable amount). With a new 1099-R, the 4a amount would be reduced but it would have no impact on 4b. Might not even be worth filing an amended return.

To me, the bigger question is how do you pay it back? As the money was rolled over, you don't have those funds to pay back. I would think it can only be paid back by undoing $6,400 of the rollover. That, if even legally possible, will require the cooperation of the current IRA custodian. You can't just send them $6,400 of post-tax money as that would leave what is probably an illegal contribution in your IRA as well as being a tax nightmare that probably eventually leads to double taxation of that $6,400.

I really don't know but I would not be surprised if what can be done depends on what type of IRA it was rolled into - a rollover IRA that can be rolled back to a 401k or in a regular tIRA that commingled the funds with other funds that cannot be rolled to a 401k.

I'd say at some point you need to tell them as they created the mess, they need to figure out how to do this in a way that is both legal and does not harm you further. Their idea of you send them $6,400, they send you a 1099-R showing $6,400 less distributed would be fine if you had just kept the money and paid taxes on it in which case you then amend and get a refund. But that doesn't work once the money was rolled over.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 123 »

I don't see where the OP has done anything wrong. All employer contributions (and their earnings) to his/her 401K will be taxable when the OP receives distributions from the IRA rollover so I don't see any adverse tax penalties or consequences to the OP.

The employer and/or 401K administrator made an error because they did not have an adequate system of controls and procedures to ensure that all employer contributions subject to a vesting schedule were isolated, separately tracked, and thoroughly reviewed prior to their distribution. This is a well documented and understood business risk the employer should have addressed in the development of their system that handled the vesting mechanism.

There are lots of employers that complicate their 401K plans with a vesting schedule for employer matching contributions. This employer did not exercise a reasonable level of care in the handling of the company's contributions, they literally threw the money out at the OP.

I don't see how the employer has much "muscle" they can use against the OP.

If the OP moved the IRA account to a custodian different than the one that received the 401K rollover it would add an additional obstruction.
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000
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 000 »

I certainly would not have any discussion with the ex-employer or authorize anyone else (e.g. IRA custodian) to do so without counsel.

In my personal opinion a reputable business would not try to recover a $6,400 mistake in employee pay that they made five years ago (yes, I know the statute of limitations may be longer than five years) and if they try to do so, I would tread very carefully dealing with them. Revealing one's willingness to capitulate may lead to further claims.

If they are merely trying to correct the tax situation (if there even is something to be corrected?), as long as the damage to me is less than the $6,400, I don't think I would take any further action besides whatever corrections are required by law. If somehow I would suffer a net loss from their incompetence, it seems reasonable to seek compensation.
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Thrifty Femme
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Thrifty Femme »

lstone19 wrote: Mon Sep 28, 2020 4:37 pm I'm finding a lot of the replies confusing. If I'm reading the original post correctly and haven't missed anything, all the money was rolled into a tIRA. So no tax impact yet. So what would this new 1099-R say? I'm assuming a correction to the original - original said $X, corrected on will say $X-6400. OP said "Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution." How? Going back to the 2018 1040, the 1099-R amount would have been reported on-line 4a (IRAs, pensions, and annuities) but not on 4b (taxable amount). With a new 1099-R, the 4a amount would be reduced but it would have no impact on 4b. Might not even be worth filing an amended return.

To me, the bigger question is how do you pay it back? As the money was rolled over, you don't have those funds to pay back. I would think it can only be paid back by undoing $6,400 of the rollover. That, if even legally possible, will require the cooperation of the current IRA custodian. You can't just send them $6,400 of post-tax money as that would leave what is probably an illegal contribution in your IRA as well as being a tax nightmare that probably eventually leads to double taxation of that $6,400.

I really don't know but I would not be surprised if what can be done depends on what type of IRA it was rolled into - a rollover IRA that can be rolled back to a 401k or in a regular tIRA that commingled the funds with other funds that cannot be rolled to a 401k.

I'd say at some point you need to tell them as they created the mess, they need to figure out how to do this in a way that is both legal and does not harm you further. Their idea of you send them $6,400, they send you a 1099-R showing $6,400 less distributed would be fine if you had just kept the money and paid taxes on it in which case you then amend and get a refund. But that doesn't work once the money was rolled over.
Interesting, you assumed 1099-R, and I assumed 1099-MISC. I don't think employers send 1099-Rs. OP, please clarify the type of 1099 they will be sending you.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by lstone19 »

000 wrote: Mon Sep 28, 2020 4:52 pm If they are merely trying to correct the tax situation (if there even is something to be corrected?), as long as the damage to me is less than the $6,400, I don't think I would take any further action besides whatever corrections are required by law. If somehow I would suffer a net loss from their incompetence, it seems reasonable to seek compensation.
But the damage will be more than $6,400 as they want the $6,400 back plus their is the cost to the OP to do all that (which may include taxes, penalties, legal and accounting fees). Any ability to correct this cleanly passed at the end of 2018 (or maybe a little later since some IRA issues are correctable until the tax return is due).

My side job is as a sports official including basketball. Basketball has the concept of correctable errors. Certain errors are only correctable for a limited period after which they become uncorrectable (e.g. bonus free throw given before the team is in the bonus) as it just becomes too complicated to correct it. Due to the all the tax laws that apply to a rollover, my opinion is that given how long has passed and certain means of correcting this are now closed to the OP, the company's error should be uncorrectable.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by lstone19 »

Thrifty Femme wrote: Mon Sep 28, 2020 4:59 pm Interesting, you assumed 1099-R, and I assumed 1099-MISC. I don't think employers send 1099-Rs. OP, please clarify the type of 1099 they will be sending you.
OP said 1099-R. And which you are technically correct that employers don't send 1099-Rs, their 401k custodians do. I suspect he meant the 401k custodian would send a corrected 1099-R.

And what would the 1099-MISC be for? The amount was already reported on a 2018 1099-R. They'd still need to correct the original 1099-R. And the OP has said the company wants the $6,400 back.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by whodidntante »

A possibly larger issue here is that the plan has to follow the plan document. So by giving you money that wasn't vested, they didn't follow the plan document. There may be a concern about losing qualified status. I don't know is what remedies are available.

Yes, you do owe the money if they are right that you received money that was not vested. While this is an ethical call, personally, I would hand it over without receiving a legal threat. I do not want money that rightly belongs to someone else and I can just go get more money. I would do that whether it was $5 or $500,000 if I were able. But in your case, this is right on the edge of the amount of money where a company might sue. It largely depends on the person making the decision.

I think, but I am not certain, that you are obligated to remove the money and all the gains on the money from your IRA. I would be 100% sure either way. You do not want excess contributions in your IRA, that I know. The penalties are horrible in that they accumulate year after year.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 000 »

lstone19 wrote: Mon Sep 28, 2020 5:07 pm
000 wrote: Mon Sep 28, 2020 4:52 pm If they are merely trying to correct the tax situation (if there even is something to be corrected?), as long as the damage to me is less than the $6,400, I don't think I would take any further action besides whatever corrections are required by law. If somehow I would suffer a net loss from their incompetence, it seems reasonable to seek compensation.
But the damage will be more than $6,400 as they want the $6,400 back plus their is the cost to the OP to do all that (which may include taxes, penalties, legal and accounting fees). Any ability to correct this cleanly passed at the end of 2018 (or maybe a little later since some IRA issues are correctable until the tax return is due).

My side job is as a sports official including basketball. Basketball has the concept of correctable errors. Certain errors are only correctable for a limited period after which they become uncorrectable (e.g. bonus free throw given before the team is in the bonus) as it just becomes too complicated to correct it. Due to the all the tax laws that apply to a rollover, my opinion is that given how long has passed and certain means of correcting this are now closed to the OP, the company's error should be uncorrectable.
I agree it should be uncorrectable, but sadly it may not be.

In any case the OP should not incur any net loss from their incompetence.
Last edited by 000 on Mon Sep 28, 2020 6:28 pm, edited 1 time in total.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Thanks for all the replies. Still a bit confused though. :D

I did post in another forum that encouraged reaching out to the plan administrator, although one person noted that no one ever pays these overpayments back. Why should I be the first one to do so? I mean this was five years ago that I stopped working there.

Here's the link and I have more details there. Note I made one error as it referenced 1099 in the letter, not 1099-R. Not sure if it would matter?

https://benefitslink.com/boards/index.p ... ent-308042
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Oh and the letter said that I would receive updated 1099's for the original tax year of the overpayment.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 8foot7 »

You first need to get an accounting of why they think you owe them money and have them explain to you to your satisfaction that money you received as part of the rollover actually wasn't yours. This should include all statements from six months before the period in question until the date of the rollover, plus the plan document as it existed at the time of your employment. Then once you receive all of that, you should tell them that for you to investigate their claim, since it was their mistake and no fault of your own, you'll need to engage the services of an attorney to ensure their claim is legitimate and if so, that tax issues and penalties are handled appropriately, and you will be either subtracting the cost of the attorney from any eventual refund you provide them or, if it is determined there was no overpayment, you will be sending them the attorney bills for reimbursement. And that you won't do any of that until they acknowledge in writing that they're aware of your demand and accede to it.

You should correct the error overall but first you need to be sure an error was made and that correcting it does not make you worse off in any way, and the costs of those assurances should be borne by the party that made the mistake.
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Thrifty Femme
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Thrifty Femme »

lstone19 wrote: Mon Sep 28, 2020 5:12 pm
Thrifty Femme wrote: Mon Sep 28, 2020 4:59 pm Interesting, you assumed 1099-R, and I assumed 1099-MISC. I don't think employers send 1099-Rs. OP, please clarify the type of 1099 they will be sending you.
OP said 1099-R. And which you are technically correct that employers don't send 1099-Rs, their 401k custodians do. I suspect he meant the 401k custodian would send a corrected 1099-R.

And what would the 1099-MISC be for? The amount was already reported on a 2018 1099-R. They'd still need to correct the original 1099-R. And the OP has said the company wants the $6,400 back.
OK, I missed the 1099-R part. They could issue a 1099-MISC for the $6400 he received because he received the money, and they probably didn't include it on whatever tax form they sent him in 2018. OP is speculating they want the money back. He didn't say they have asked for it back.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Thrifty Femme wrote: Mon Sep 28, 2020 7:00 pm
lstone19 wrote: Mon Sep 28, 2020 5:12 pm
Thrifty Femme wrote: Mon Sep 28, 2020 4:59 pm Interesting, you assumed 1099-R, and I assumed 1099-MISC. I don't think employers send 1099-Rs. OP, please clarify the type of 1099 they will be sending you.
OP said 1099-R. And which you are technically correct that employers don't send 1099-Rs, their 401k custodians do. I suspect he meant the 401k custodian would send a corrected 1099-R.

And what would the 1099-MISC be for? The amount was already reported on a 2018 1099-R. They'd still need to correct the original 1099-R. And the OP has said the company wants the $6,400 back.
OK, I missed the 1099-R part. They could issue a 1099-MISC for the $6400 he received because he received the money, and they probably didn't include it on whatever tax form they sent him in 2018. OP is speculating they want the money back. He didn't say they have asked for it back.
Sorry I mistakenly said 1099-R when the letter said 1099....and that they would be sending me the corrected 1099 for the tax year of the original distribution.

The letter specifically says this: "The overpayment is $6426.10 and must be returned to the Plan excluding any additional interest".
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 000 »

8foot7 wrote: Mon Sep 28, 2020 6:12 pm You first need to get an accounting of why they think you owe them money and have them explain to you to your satisfaction that money you received as part of the rollover actually wasn't yours. This should include all statements from six months before the period in question until the date of the rollover, plus the plan document as it existed at the time of your employment. Then once you receive all of that, you should tell them that for you to investigate their claim, since it was their mistake and no fault of your own, you'll need to engage the services of an attorney to ensure their claim is legitimate and if so, that tax issues and penalties are handled appropriately, and you will be either subtracting the cost of the attorney from any eventual refund you provide them or, if it is determined there was no overpayment, you will be sending them the attorney bills for reimbursement. And that you won't do any of that until they acknowledge in writing that they're aware of your demand and accede to it.

You should correct the error overall but first you need to be sure an error was made and that correcting it does not make you worse off in any way, and the costs of those assurances should be borne by the party that made the mistake.
+1000
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

I'm just going to type out the entirety of the letter if that helps any:

You are receiving this letter because we discovered you have an overpayment from your account in XXX 401K plan. We discovered the overpayment during an audit in which we we determined the vested amount in the 401K plan was overstated when we processed your distribution request. As a result the overpayment is not eligible to be distributed because it is not vested.

Our records indicate that you processed a distribution payment on 1/18/2018. The overpayment is $6426.10 and must be returned to the plan excluding any additional interest.

In addition, the plan must notify you that the overpayment amount was not an eligible rollover distribution. If your distribution was rolled over into a qualified retirement plan or IRA, you may request that the plan administrator or your IRA trustee transfer the overpayment funds back to the Plan.

You will receive update 1099's for the original tax year of the overpayment. These will be mailed by the end of November. You may wish to consult your own tax advisor about the individual income tax consequences associated with the correction.

We apologize for the overpayment and any inconvenience this may cause you.


EDITORS NOTE---Not that my 1.5 years at this employer was awful enough, but they are haunting me 5+ years past my last day on the job. So yes there is definitely an inconvenience. :(
Trader Joe
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Trader Joe »

cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Trader Joe wrote: Mon Sep 28, 2020 7:21 pm
cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
This is ultimately the way I'm leaning in all honesty, however I'm now facing the fact that I'm going to be on the hook for at least $2400 in taxes and early withdrawal penalties, since they are sending a revised 1099.
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unclescrooge
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by unclescrooge »

cdogstu99 wrote: Mon Sep 28, 2020 7:30 pm
Trader Joe wrote: Mon Sep 28, 2020 7:21 pm
cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
This is ultimately the way I'm leaning in all honesty, however I'm now facing the fact that I'm going to be on the hook for at least $2400 in taxes and early withdrawal penalties, since they are sending a revised 1099.
How is this a taxable event if you send the money back?
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Watty
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Watty »

I am not sure that it would be a good idea or not but if you move that IRA to a different custodian(like from Fidelity to Vanguard) then they will not be able to claw back the money directly from the custodian.

It is not the same but I have heard of mistakes that were made with a payroll automatic deposit there were fixed a few days later by the just reversing the transaction and withdrawing the money and the employee did not need to approve it. The authority to reverse transactions like that was part of the fine print in the agreement when you set up automatic deposit. There was likely similar fine print in the agreement to roll the money from the 401k to the IRA.
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Thrifty Femme
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Thrifty Femme »

cdogstu99 wrote: Mon Sep 28, 2020 7:16 pm I'm just going to type out the entirety of the letter if that helps any:

You are receiving this letter because we discovered you have an overpayment from your account in XXX 401K plan. We discovered the overpayment during an audit in which we we determined the vested amount in the 401K plan was overstated when we processed your distribution request. As a result the overpayment is not eligible to be distributed because it is not vested.

Our records indicate that you processed a distribution payment on 1/18/2018. The overpayment is $6426.10 and must be returned to the plan excluding any additional interest.

In addition, the plan must notify you that the overpayment amount was not an eligible rollover distribution. If your distribution was rolled over into a qualified retirement plan or IRA, you may request that the plan administrator or your IRA trustee transfer the overpayment funds back to the Plan.

You will receive update 1099's for the original tax year of the overpayment. These will be mailed by the end of November. You may wish to consult your own tax advisor about the individual income tax consequences associated with the correction.

We apologize for the overpayment and any inconvenience this may cause you.


EDITORS NOTE---Not that my 1.5 years at this employer was awful enough, but they are haunting me 5+ years past my last day on the job. So yes there is definitely an inconvenience. :(
That helps a lot. You should PM Spirit Rider or Alan S., since you can't tag people here. You need to find out what could happen if you refuse to comply. Trustee to trustee probably means it's not a distribution that is taxable or penalized, but your IRA custodian might charge a small fee like under $100.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

unclescrooge wrote: Mon Sep 28, 2020 7:33 pm
cdogstu99 wrote: Mon Sep 28, 2020 7:30 pm
Trader Joe wrote: Mon Sep 28, 2020 7:21 pm
cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
This is ultimately the way I'm leaning in all honesty, however I'm now facing the fact that I'm going to be on the hook for at least $2400 in taxes and early withdrawal penalties, since they are sending a revised 1099.
How is this a taxable event if you send the money back?
It wouldn't be if I sent it back, but I wasn't planning on sending it back unless they forced me to.
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cdogstu99
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cdogstu99 »

Watty wrote: Mon Sep 28, 2020 7:34 pm I am not sure that it would be a good idea or not but if you move that IRA to a different custodian(like from Fidelity to Vanguard) then they will not be able to claw back the money directly from the custodian.

It is not the same but I have heard of mistakes that were made with a payroll automatic deposit there were fixed a few days later by the just reversing the transaction and withdrawing the money and the employee did not need to approve it. The authority to reverse transactions like that was part of the fine print in the agreement when you set up automatic deposit. There was likely similar fine print in the agreement to roll the money from the 401k to the IRA.
Yes it is actually with Fidelity now and out of their control.
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Thrifty Femme
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by Thrifty Femme »

cdogstu99 wrote: Mon Sep 28, 2020 7:41 pm It wouldn't be if I sent it back, but I wasn't planning on sending it back unless they forced me to.
They probably can't force you to pay it back, but the IRS might get in touch with you. As it is, the IRS probably has more important matters to deal with right now.
lstone19
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by lstone19 »

cdogstu99 wrote: Mon Sep 28, 2020 7:30 pm
Trader Joe wrote: Mon Sep 28, 2020 7:21 pm
cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
This is ultimately the way I'm leaning in all honesty, however I'm now facing the fact that I'm going to be on the hook for at least $2400 in taxes and early withdrawal penalties, since they are sending a revised 1099.
How do you figure a revised 1099-R would trigger $2400 in taxes and early withdrawal penalties? The revised 1099-R would show a smaller distribution. It will cause a discrepancy between the amount they say they distributed and the amount you say you rolled over into the IRA which could cause it to appear that you made an illegal contribution to the IRA but it’s not, on its own, going to cause more income to be reported. And it’s certainly not an early distribution from a retirement plan as they’re saying it never should have been a retirement plan distribution. Presumably, instead of a 1099-R for $X, they’ll correct it to one for $x-6400.
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grabiner
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by grabiner »

lstone19 wrote: Mon Sep 28, 2020 8:03 pm How do you figure a revised 1099-R would trigger $2400 in taxes and early withdrawal penalties? The revised 1099-R would show a smaller distribution. It will cause a discrepancy between the amount they say they distributed and the amount you say you rolled over into the IRA which could cause it to appear that you made an illegal contribution to the IRA but it’s not, on its own, going to cause more income to be reported. And it’s certainly not an early distribution from a retirement plan as they’re saying it never should have been a retirement plan distribution. Presumably, instead of a 1099-R for $X, they’ll correct it to one for $x-6400.
But an illegal contribution to an IRA is also subject to penalty, on IRS Form 5329. The penalty is 6%, and is due for every year until the overcontribution is corrected. In addition, if it is corrected by withdrawing the money from the IRA, taxes would apply to the withdrawal. You need to check with your tax advisor.
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mattsm
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by mattsm »

It doesn't sound like an illegal contribution.

Inform them your hourly rate for fixing all issues is $500/hr and a minimum of 40 hours.

-M
lstone19
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by lstone19 »

grabiner wrote: Mon Sep 28, 2020 9:35 pm
lstone19 wrote: Mon Sep 28, 2020 8:03 pm How do you figure a revised 1099-R would trigger $2400 in taxes and early withdrawal penalties? The revised 1099-R would show a smaller distribution. It will cause a discrepancy between the amount they say they distributed and the amount you say you rolled over into the IRA which could cause it to appear that you made an illegal contribution to the IRA but it’s not, on its own, going to cause more income to be reported. And it’s certainly not an early distribution from a retirement plan as they’re saying it never should have been a retirement plan distribution. Presumably, instead of a 1099-R for $X, they’ll correct it to one for $x-6400.
But an illegal contribution to an IRA is also subject to penalty, on IRS Form 5329. The penalty is 6%, and is due for every year until the overcontribution is corrected. In addition, if it is corrected by withdrawing the money from the IRA, taxes would apply to the withdrawal. You need to check with your tax advisor.
It wasn't a contribution, it was a rollover. Different rules. I don't know what the rules are regarding rolling over too much but I would not assume the rules for over contributing apply to this.
cogito
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by cogito »

This strikes me as the kind of generic letter that gets automated and sent out to many people at once, with the past employer hoping to get at least half of the responses/money back. Most likely this happened to a few people other than yourself, and they may or may not actually intend to pursue any of these cases.

That being said, ethically, its hard to escape the fact that it sounds like they aren't totally in the wrong. Also, ethically, it sounds like they have been grossly incompetent and have failed to rectify this in a way that hasn't caused undue harm to you. I mean, this was FIVE years ago! I agree with what others have said... ignore them, then tell them to deliver to total written explanation with detailed evidence, and then finally, tell them how much you will bill them to unwind all the pain and annoyance this has caused you. If they are willing to actually follow you down that whole path (doubtful) then, hey, well, you probably do owe them somethin.
123
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by 123 »

The employer always has the option of retroactively amending their plan to eliminate the time element in the vesting schedule and allow all employer matching contributions to vest 100% immediately. This would eliminate the overpayment the OP was involved with.
The closest helping hand is at the end of your own arm.
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teen persuasion
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by teen persuasion »

123 wrote: Tue Sep 29, 2020 12:20 am The employer always has the option of retroactively amending their plan to eliminate the time element in the vesting schedule and allow all employer matching contributions to vest 100% immediately. This would eliminate the overpayment the OP was involved with.
Wouldn't this open another can of worms? They would need to apply this to everyone, not just OP.

Just want to reiterate the plea to make sure the ex-employer is correct. Not quite the same scenario, but DH had a mistake surface with an ex-employer's 401k after another switch in provider. DH had left his contributions in the 401k for a few years, but another planned switch of provider prompted us to finally roll it over to a tIRA. Unfortunately, we didn't get the process started in time to get it done before the migration, and the lockout time. When the migration was complete, we noticed that his vesting was no longer 100% (his employer had gone out of business, and everyone was made 100% vested). We contacted the new provider, but they couldn't help us, they only had the info given to them in the migration, we had to contact the ex-employer. How do you contact an out of business company? Well, the 401k continued to exist because it was part of a larger employer group, so we contacted them. Luckily, the person DH reached had been a coworker at ex-employer, so knew about the situation and full vesting, and they ultimately got the vesting reinstated before we rolled it out to a tIRA.

So mistakes can be made in vesting, even years later. In our case it was the transfer of data between providers that introduced the error. We were lucky that we were paying attention and caught it immediately; we'd been lax previously.
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by JonnyDVM »

Trader Joe wrote: Mon Sep 28, 2020 7:21 pm
cdogstu99 wrote: Mon Sep 28, 2020 8:28 am Just got a letter from my ex-employer (that I left in 2015) about a $6400 overpayment from my 401K plan. The letter claims the portion was not vested and was distributed on error. This distribution happened in 2018, when I rolled over the funds from the 401K into a Traditional IRA account. They claim that they are going to issue a new 1099-R. Seems like consensus online is that ultimately I would likely owe them the money, but they might not pursue it. Although I think the new 1099 would make me have to amend my old tax return and pay a penalty on the distribution. Anyone have any experience with this?
If I received this letter from an ex-employer after 5 years, I would not acknowledge the letter or respond in any way.
I have reconsidered my opinion. Given the time that’s passed I agree the best course of action is to shrug and ignore it. I doubt they will pursue the matter legally. If they ever do, that would be the time to negotiate payment of accountant fees created from their mistake.
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WillRetire
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by WillRetire »

cdogstu99 wrote: Mon Sep 28, 2020 1:04 pm
adamthesmythe wrote: Mon Sep 28, 2020 11:15 am
cdogstu99 wrote: Mon Sep 28, 2020 11:07 am

I honestly have no idea, I just signed whatever the normal paperwork is that you do when you get hired by an employer. I don't have those records.

Send a letter stating that you have received their communication and that you require a detailed explanation of the error, why they think you owe money, and a copy of any agreement or valid employee handbook that shows you have agreed to correct their errors.

Or better still, wait for a second letter before sending this.
Think this is the way I'm leaning...i'll wait for that second letter before I do anything.
Based on personal experience with a similar situation, I agree with the 1st part of the recommendation from adamthesmythe: Challenge it. But do not wait for 2nd letter, as by then it may be too late for them to place you in the pile of "challengers".

You are probably not the only one who received this letter. This is most likely the result of an audit/fishing expedition to raise money or lower costs for the employer or plan. Those who don't respond will be stuck with paying it back or receiving revised 1099s or both. Silence is concurrence.

With so much time passing since the contribution in question (or is it non-vested matching that is in question?), it is very difficult to determine exactly what that amount grew, or shrunk, to over the years. Make that point during your communications, along with the lateness, the lack of detail, and mismanagement of the plan.

Be a squeaky wheel. You stand to lose nothing by challenging this.
WillRetire
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Re: 401K Overpayment - Ex Employer Asking for Money Back

Post by WillRetire »

One more thing... they have a lot of nerve doing this now during a recession and global pandemic. Markets dropped dramatically and haven't completely recovered. This puts undue stress on you and your family to contend with an ALLEGED ERROR MADE BY THEM. It will take you many hours of personal time to understand and verify their claim, respond to it, refile taxes if needed, all during a pandemic where people already have enough stress. YOU did nothing wrong. THEY committed an error of some sort, and took way too long to address it. You need more information and more time.

Tell them that.

Get your case placed in the "challengers"/"squeaky wheel" pile.

P.S. Something similar happened to me in 2009. For a less amount than yours. MegaCorp dropped it after I raised the sorts of questions I listed above. Interesting coincidence that it too was a great recession year.

P.P.S. I am pro-business. Companies need to administer benefits properly, legally, timely.
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