Overfunded 401k

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Topic Author
willygreen
Posts: 50
Joined: Mon Jan 30, 2017 7:43 pm

Overfunded 401k

Post by willygreen »

Hello,

My wife worked for two months in 2018 prior to resigning to stay at home with our kids. After she resigned, we rolled over her 401k to Schwab and invested it accordingly.

Two weeks ago she received a letter from the 401k custodian for her company that her 401k was overfunded by approximately $7k in 2018, and they are asking her to withdraw the money from her rollover account and send them a check. If we don't send them the money, the letter says they will send her a 1099-MISC for the amount. They provide no phone number, only an address where they want a certified check.

She will return the money if it isn't hers, but need to take the right steps to ensure this is real. I assume we need to go back and look at her pay stubs and research the deductions. But if the account was overfunded, wouldn't the money go back to her previous employer, not the 401k custodian.

I should mention that she worked for a well known, large company with thousands of employees, but were also known for shoddy HR and payroll practices. So not surprised if there were mistakes made.

Looking for advice on the best way to research and address.

Thanks!
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WingsFan4Life
Posts: 177
Joined: Fri Jul 18, 2014 6:54 pm

Re: Overfunded 401k

Post by WingsFan4Life »

Did she actually have her 401k overfunded? Check the statements first before you do anything.
clipson
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Joined: Sun Jun 11, 2017 12:03 pm

Re: Overfunded 401k

Post by clipson »

This smells fishy. I recommend calling both the custodian (pull their info from the website, not the letter) and the HR department if you have a contact at her former employer.

If she over-contributed (i.e., exceeded the 402(g) limit for 2018 of $18,500), they should simply issue a refund of the overage using a 1099-R. I can't think of a scenario where she would have to withdraw the funds on her own and pay them back.

If there was a clerical error which caused excess funds to be contributed to her account, then I can understand why the provider may need to be repaid.
bigdave18629
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Joined: Fri Feb 22, 2019 10:53 am

Re: Overfunded 401k

Post by bigdave18629 »

Have you checked to see if there is a vesting schedule on the 401k. I don't how she could have over funded in 2 months unless she made really good money and put in a huge percentage. Could be something tied to the rules of the 401k, but either way, her money should be her money.
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WingsFan4Life
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Joined: Fri Jul 18, 2014 6:54 pm

Re: Overfunded 401k

Post by WingsFan4Life »

bigdave18629 wrote: Mon Apr 29, 2019 8:54 am Have you checked to see if there is a vesting schedule on the 401k. I don't how she could have over funded in 2 months unless she made really good money and put in a huge percentage. Could be something tied to the rules of the 401k, but either way, her money should be her money.
If there was a vesting period, they shouldn't have let her rollover the employer contribution (if there was any).
Topic Author
willygreen
Posts: 50
Joined: Mon Jan 30, 2017 7:43 pm

Re: Overfunded 401k

Post by willygreen »

bigdave18629 wrote: Mon Apr 29, 2019 8:54 am Have you checked to see if there is a vesting schedule on the 401k. I don't how she could have over funded in 2 months unless she made really good money and put in a huge percentage. Could be something tied to the rules of the 401k, but either way, her money should be her money.
We knew she was only working two months, so we set her 401k deduction at 50%. On top of that, she had a great deal of PTO accrued paid out on her final check. So there were large deductions on the last paycheck.
Topic Author
willygreen
Posts: 50
Joined: Mon Jan 30, 2017 7:43 pm

Re: Overfunded 401k

Post by willygreen »

clipson wrote: Mon Apr 29, 2019 8:52 am This smells fishy. I recommend calling both the custodian (pull their info from the website, not the letter) and the HR department if you have a contact at her former employer.

If she over-contributed (i.e., exceeded the 402(g) limit for 2018 of $18,500), they should simply issue a refund of the overage using a 1099-R. I can't think of a scenario where she would have to withdraw the funds on her own and pay them back.

If there was a clerical error which caused excess funds to be contributed to her account, then I can understand why the provider may need to be repaid.
Thanks, just contacted the 401k custodian and calling HR next.
nolesrule
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Joined: Thu Feb 26, 2015 9:59 am

Re: Overfunded 401k

Post by nolesrule »

Was she a HCE in 2018 based on her 2017 income?
Greenman72
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Joined: Fri Nov 01, 2013 2:17 pm

Re: Overfunded 401k

Post by Greenman72 »

willygreen wrote: Mon Apr 29, 2019 8:40 am If we don't send them the money, the letter says they will send her a 1099-MISC for the amount.
Hmmmmm.....let me see. Let's assume that you're in the 24% tax bracket. You can either pay them $7,000 or you can pay $1,680 in taxes.

Let me think about this for a while.
Spirit Rider
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Re: Overfunded 401k

Post by Spirit Rider »

If this was an excess contribution as questioned by @norules, they should have contacted you before 3/15. If it was an excess deferral, they should have contacted you before 4/15. In neither case would the proper corrective action require you to send any amount to them.

If the overfunding were from her contributions, at worst case she would need to remove the excess and earnings. Those would be her money and would never go back to the employer. If they were employer contributions, then that would be another issue.
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Overfunded 401k

Post by 123 »

Messy situation. To correctly return funds you would likely have to contact the IRA custodian that you moved the funds to and have them transfer the funds back to the 401K plan. Or you may need to have the 401K plan contact the IRA custodian to retrieve the funds (may need 3-way phone call). If you withdraw funds from the IRA account yourself you are creating a taxable event. In essence you need to rollover part of the IRA back to the 401k custodian to facilitate all this.

I would think there is no accurate resolution that would permit any of the excess contribution to remain in the rollover IRA account.
The closest helping hand is at the end of your own arm.
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