Intentional 401k overcontribution to get new employer match

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nerdinvestor
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Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 12:29 pm

My fiance switched jobs a couple weeks ago. At her old employer, she managed to max out her 401k (all Roth) in the first four months of the year, and additionally received a 2.5% match from her employer on a pre-tax basis. She is now trying to sign up for benefits at her new employer. Her new employer matches 3% of salary, but they are also asking her how much she has already contributed towards a 401k this year, and she needs to provide a response soon. Since she has already maxed it out, I'm worried a lot of money (the 3% match) would be left on the table. It's also worth noting that though she contributed to a Roth 401k this year, she probably should have contributed towards a traditional 401k instead since we're in a high tax state and currently have a high income.

Is there any way for her to get the full match from both employers, given that she has already maxed out her 401k? We're willing to go through some hoops if necessary, as long as the process is clear.

Thanks!

Spirit Rider
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Re: Intentional 401k overcontribution to get new employer match

Post by Spirit Rider » Tue Jun 30, 2015 1:26 pm

She should contact her previous employer and ask if they would remove a certain amount of excess contributions. However, depending on how her previous employer allocated the company match and will recover any match on returned excess contributions, it may not benefit her much at all.

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Re: Intentional 401k overcontribution to get new employer match

Post by whaleknives » Tue Jun 30, 2015 1:38 pm

It doesn't look promising:
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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 3:50 pm

Thanks. Judging by the link you posted, it sounds like the IRS is fine with the overcontribution as long as I get it out by April 15th of next year. Does this sound correct? What would the actual procedure be in this case, and how should I decide which 401k to withdraw the overcontribution from?

Has anyone done this sort of thing before? Seems unusual in some respects, but given that many people change jobs mid-year, I'd imagine that a lot of people have run into it.

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Re: Intentional 401k overcontribution to get new employer match

Post by sport » Tue Jun 30, 2015 3:55 pm

nerdinvestor wrote:Thanks. Judging by the link you posted, it sounds like the IRS is fine with the overcontribution as long as I get it out by April 15th of next year. Does this sound correct? What would the actual procedure be in this case, and how should I decide which 401k to withdraw the overcontribution from?

Has anyone done this sort of thing before? Seems unusual in some respects, but given that many people change jobs mid-year, I'd imagine that a lot of people have run into it.
If you withdraw an overcontribution, what happens to the matching money?

livesoft
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Re: Intentional 401k overcontribution to get new employer match

Post by livesoft » Tue Jun 30, 2015 3:56 pm

Ask for a "corrective distribution of an excess deferral" which is IRS speak. Search the forum for those words for more info.

The first 401(k) folks should just laugh at the request. The second 401(k) folks will have to honor it. They will probably remove company match, too, but you never know.
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Re: Intentional 401k overcontribution to get new employer match

Post by cheese_breath » Tue Jun 30, 2015 3:58 pm

Don't try gaming the system. You're liable to get burned.
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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 4:13 pm

livesoft wrote:Ask for a "corrective distribution of an excess deferral" which is IRS speak. Search the forum for those words for more info.

The first 401(k) folks should just laugh at the request. The second 401(k) folks will have to honor it. They will probably remove company match, too, but you never know.
I'd actually prefer to remove the funds from the first 401k, since that was a Roth, and we really should have done traditional instead for tax reasons. Why would they laugh at the request?

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Re: Intentional 401k overcontribution to get new employer match

Post by livesoft » Tue Jun 30, 2015 4:24 pm

nerdinvestor wrote: Why would they laugh at the request?
1. Because they know it was not an excess deferral when the money was being contributed.
2. Because they can.
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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 4:41 pm

So what do others do in this situation? I did a rough calculation and the amount we leave on the table if we don't get the new employer match is over five thousand dollars, which is not a trivial amount of money...

cherijoh
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Re: Intentional 401k overcontribution to get new employer match

Post by cherijoh » Tue Jun 30, 2015 4:58 pm

livesoft wrote:
nerdinvestor wrote: Why would they laugh at the request?
1. Because they know it was not an excess deferral when the money was being contributed.
2. Because they can.
Also because your fiancé is a FORMER employee - so why should they go out of their way to do something they have no obligation to do? As Livesoft pointed out, it wasn't an excess contribution when the contribution was made - so they will know you did it intentionally.

There needs to be a mechanism is place for current employees who switched jobs and inadvertently put in too much in the new plan, but there is no need for them to have a system in place to do what you want. You are basically asking for a "do over" to suit your preference. Your fiancé wouldn't have had this option if she had stayed with the company the whole year would she?

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cheese_breath
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Re: Intentional 401k overcontribution to get new employer match

Post by cheese_breath » Tue Jun 30, 2015 5:06 pm

livesoft wrote:
nerdinvestor wrote: Why would they laugh at the request?
1. Because they know it was not an excess deferral when the money was being contributed.
2. Because they can.
And from their perspective it's not an excess contribution. The excess contribution is with the new employer.
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Re: Intentional 401k overcontribution to get new employer match

Post by Alan S. » Tue Jun 30, 2015 5:17 pm

You may wonder what happens if the elective deferral limits are exceeded by a mix of Roth and traditional deferrals in different plans.

Since each plan is unaware of the other plan deferrals there will be no action taken by the plans unless one or both plans are notified by the employee to correct the excess deferrals by the employee prior to 4/15 of the following year. The option of which deferral type is used to correct the excess ends 4/15. Either plan can refuse to make the corrective distribution even if timely requested.

The IRS computer matching should total the W-2 coding for elective deferrals. The excess is deemed to have occurred in the traditional 401k deferrals, regardless of the order in which the deferrals were made. The IRS would require that the excess amount be added to line 7 wages for 2015. There is no basis added to the plan due to these tax payments and therefore when the 401k dollars are eventually distributed in retirement, or distributed from a rollover IRA, they will be taxed a second time.

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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 6:04 pm

Alan S. wrote:You may wonder what happens if the elective deferral limits are exceeded by a mix of Roth and traditional deferrals in different plans.

Since each plan is unaware of the other plan deferrals there will be no action taken by the plans unless one or both plans are notified by the employee to correct the excess deferrals by the employee prior to 4/15 of the following year. The option of which deferral type is used to correct the excess ends 4/15. Either plan can refuse to make the corrective distribution even if timely requested.

The IRS computer matching should total the W-2 coding for elective deferrals. The excess is deemed to have occurred in the traditional 401k deferrals, regardless of the order in which the deferrals were made. The IRS would require that the excess amount be added to line 7 wages for 2015. There is no basis added to the plan due to these tax payments and therefore when the 401k dollars are eventually distributed in retirement, or distributed from a rollover IRA, they will be taxed a second time.
Even if the plans do refuse to make the corrective distribution, might it still make sense to overcontribute and just pay the double tax? How should one weigh this option vs. the employer match?

Also, how would the overcontribution be taxed if it was a Roth contribution rather than a traditional? If we do end up overcontributing, it's worth knowing if it would be better to do so on a Roth or pre-tax basis.

DSInvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by DSInvestor » Tue Jun 30, 2015 6:09 pm

Does your wife need to make a contribution to receive the match in the new plan? Some plans do not.
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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 6:13 pm

DSInvestor wrote:Does your wife need to make a contribution to receive the match in the new plan? Some plans do not.
Good question - I'm looking into this.

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Re: Intentional 401k overcontribution to get new employer match

Post by DSInvestor » Tue Jun 30, 2015 6:40 pm

nerdinvestor wrote:
DSInvestor wrote:Does your wife need to make a contribution to receive the match in the new plan? Some plans do not.
Good question - I'm looking into this.
If contribution is required, also check if contributions must be made every pay period to receive the max match. This may affect whether you should front load the 401k contributions early in the year or spread them out over 12 months to capture the match.
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Re: Intentional 401k overcontribution to get new employer match

Post by Martin » Tue Jun 30, 2015 6:47 pm

cherijoh wrote:
livesoft wrote:
nerdinvestor wrote: Why would they laugh at the request?
1. Because they know it was not an excess deferral when the money was being contributed.
2. Because they can.
Also because your fiancé is a FORMER employee - so why should they go out of their way to do something they have no obligation to do? As Livesoft pointed out, it wasn't an excess contribution when the contribution was made - so they will know you did it intentionally.

There needs to be a mechanism is place for current employees who switched jobs and inadvertently put in too much in the new plan, but there is no need for them to have a system in place to do what you want. You are basically asking for a "do over" to suit your preference. Your fiancé wouldn't have had this option if she had stayed with the company the whole year would she?
I inadvertently did over committed and it was easy to correct through Vanguard who administers our plan. If I remember correctly the match was lost as well.

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Re: Intentional 401k overcontribution to get new employer match

Post by Martin » Tue Jun 30, 2015 6:48 pm

Can she contribute post tax dollars? (Not Roth) if so it is possible the match could go against post tax dollars.

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Re: Intentional 401k overcontribution to get new employer match

Post by CFM300 » Tue Jun 30, 2015 7:41 pm

I'm confused. I understand that you'd prefer the contributions go into a Traditional rather than Roth 401(k), but I don't understand how you'd gain $5k in matching from Employer 2 had she maxed deferrals there rather than with Employer 1. How will a jump from 2.5% to 3.0% matching yield an additional $5k?

$5k = (Salary 2 x 3%) - (Salary 1 x 2.5%)

If Salary 1 were $40k, then the 2.5% matching would have been $1,000. For her to gain $5k from 3% matching, Salary 2 would have to be $200k (resulting in $6k matching).

If Salary 1 were $100k, then the 2.5% matching would have been $2,500. For her to gain $5k from 3% matching, Salary 2 would have to be $250,000 (resulting in $7,500 matching).

What am I missing?

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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jun 30, 2015 8:02 pm

CFM300 wrote:I'm confused. I understand that you'd prefer the contributions go into a Traditional rather than Roth 401(k), but I don't understand how you'd gain $5k in matching from Employer 2 had she maxed deferrals there rather than with Employer 1. How will a jump from 2.5% to 3.0% matching yield an additional $5k?

$5k = (Salary 2 x 3%) - (Salary 1 x 2.5%)

If Salary 1 were $40k, then the 2.5% matching would have been $1,000. For her to gain $5k from 3% matching, Salary 2 would have to be $200k (resulting in $6k matching).

If Salary 1 were $100k, then the 2.5% matching would have been $2,500. For her to gain $5k from 3% matching, Salary 2 would have to be $250,000 (resulting in $7,500 matching).

What am I missing?
Sorry for the confusion. The goal is to try to get both matching contributions in full. Basically the ideal outcome is to leave just enough in the old employer's 401k to get the full 2.5% match (which will have to be Roth, since these contributions are already made), and then contribute the entire remainder of the 17.5k limit to the new employer's 401k (traditional pre-tax, in this case), which should be more than enough to get the full 3% match. Does this make more sense? Is it possible to make this happen?

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Re: Intentional 401k overcontribution to get new employer match

Post by CFM300 » Tue Jun 30, 2015 8:19 pm

Thanks for the clarification. I guess I should have been able to figure that out.

Her salary must be at least $170k in order for a 3% match to be worth more than $5k. Nice problem to have.

Unfortunately, I have no advice regarding undoing the previous 401(k) contributions. Best of luck.

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Re: Intentional 401k overcontribution to get new employer match

Post by cherijoh » Tue Jun 30, 2015 8:23 pm

Martin wrote:
cherijoh wrote:
livesoft wrote:
nerdinvestor wrote: Why would they laugh at the request?
1. Because they know it was not an excess deferral when the money was being contributed.
2. Because they can.
Also because your fiancé is a FORMER employee - so why should they go out of their way to do something they have no obligation to do? As Livesoft pointed out, it wasn't an excess contribution when the contribution was made - so they will know you did it intentionally.

There needs to be a mechanism is place for current employees who switched jobs and inadvertently put in too much in the new plan, but there is no need for them to have a system in place to do what you want. You are basically asking for a "do over" to suit your preference. Your fiancé wouldn't have had this option if she had stayed with the company the whole year would she?
I inadvertently did over committed and it was easy to correct through Vanguard who administers our plan. If I remember correctly the match was lost as well.
Yes, If you work for the same company all year, the payroll system can be set up to make sure that employees can't over-contribute. But when you switch jobs, that "fail-safe" won't work since they have no way of knowing how much (if any) you contributed in your former company's plan.

But the OP wants to over contribute on purpose and then choose from which plan to remove the excess funds. I don't think the plan administrator for the former employer is obligated to offer this option. And for sure they wouldn't let you keep the match.

Unlike IRAs, you don't generally have the option to change your mind after your payroll withholding is made with a 401k plan. If they don't offer this option to their current employees, why would they do it for former employees?

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Re: Intentional 401k overcontribution to get new employer match

Post by goingup » Wed Jul 01, 2015 4:59 pm

nerdinvestor wrote:Her new employer matches 3% of salary, but they are also asking her how much she has already contributed towards a 401k this year, and she needs to provide a response soon. Since she has already maxed it out, I'm worried a lot of money (the 3% match) would be left on the table.
It's great that she was able to max out her 401K. When she is able to participate in her new employer's plan (which will be Jan. 2016) you might want to pace your contributions so they continue through the end of the year. Many employers contribute the match only as long as you are contributing. If you reach the 18K contribution limit (or whatever it is in 2016) before the last pay period she may well be leaving money on the table, unless the employer uses a "true up" method.

I don't see any way for her to participate in the new 401K in 2015 without lying to her new employer or running afoul of the IRS. I'd just leave it alone but be prepared to participate beginning January 2016.

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Re: Intentional 401k overcontribution to get new employer match

Post by ERISA Stone » Wed Jul 01, 2015 5:19 pm

The plan sponsor must provide the matching contribution based on the allocation formula. So if an excess deferral is removed, you must also forfeit any match that is related to that excess (if this were an ADP test failure, it is possible to receive a refund on the excess deferral if the participant in question were vested), as you were not eligible to receive those funds.

You don't mention the exact formula in either plan. You say 2.5%, but that's usually something like 50% of deferrals up to 5% of compensation. It could actually be 100% of deferrals up to 2.5% of compensation, but that's not a typical formula as it doesn't help HCEs.

Something I'm confused about - someone asked if the wife needed to make a contribution to receive the match. If the contribution is a match, then by definition, the wife must defer to receive it.

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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Thu Jul 02, 2015 12:16 pm

ERISA Stone wrote:The plan sponsor must provide the matching contribution based on the allocation formula. So if an excess deferral is removed, you must also forfeit any match that is related to that excess (if this were an ADP test failure, it is possible to receive a refund on the excess deferral if the participant in question were vested), as you were not eligible to receive those funds.

You don't mention the exact formula in either plan. You say 2.5%, but that's usually something like 50% of deferrals up to 5% of compensation. It could actually be 100% of deferrals up to 2.5% of compensation, but that's not a typical formula as it doesn't help HCEs.

Something I'm confused about - someone asked if the wife needed to make a contribution to receive the match. If the contribution is a match, then by definition, the wife must defer to receive it.
In her case, both plans offer a paycheck-by-paycheck true-up. The first plan matches 50% of deferrals up to 5% of compensation, and the second matches 100% of deferrals up to 3% of compensation. Given that, it seems to me like it should be possible to get both matches, right?

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Re: Intentional 401k overcontribution to get new employer match

Post by ERISA Stone » Thu Jul 02, 2015 1:20 pm

nerdinvestor wrote:
ERISA Stone wrote:The plan sponsor must provide the matching contribution based on the allocation formula. So if an excess deferral is removed, you must also forfeit any match that is related to that excess (if this were an ADP test failure, it is possible to receive a refund on the excess deferral if the participant in question were vested), as you were not eligible to receive those funds.

You don't mention the exact formula in either plan. You say 2.5%, but that's usually something like 50% of deferrals up to 5% of compensation. It could actually be 100% of deferrals up to 2.5% of compensation, but that's not a typical formula as it doesn't help HCEs.

Something I'm confused about - someone asked if the wife needed to make a contribution to receive the match. If the contribution is a match, then by definition, the wife must defer to receive it.
In her case, both plans offer a paycheck-by-paycheck true-up. The first plan matches 50% of deferrals up to 5% of compensation, and the second matches 100% of deferrals up to 3% of compensation. Given that, it seems to me like it should be possible to get both matches, right?
As long as any refund doesn't take her deferral under 5% of compensation under the former plan, and/or 3% of compensation under the current plan, I don't think it will be a problem.

When you say "paycheck-to-paycheck true-up", do you mean she receives a match on a pay period basis, and then the amounts are trued up at year end?

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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Thu Jul 02, 2015 1:23 pm

ERISA Stone wrote:
nerdinvestor wrote:
ERISA Stone wrote:The plan sponsor must provide the matching contribution based on the allocation formula. So if an excess deferral is removed, you must also forfeit any match that is related to that excess (if this were an ADP test failure, it is possible to receive a refund on the excess deferral if the participant in question were vested), as you were not eligible to receive those funds.

You don't mention the exact formula in either plan. You say 2.5%, but that's usually something like 50% of deferrals up to 5% of compensation. It could actually be 100% of deferrals up to 2.5% of compensation, but that's not a typical formula as it doesn't help HCEs.

Something I'm confused about - someone asked if the wife needed to make a contribution to receive the match. If the contribution is a match, then by definition, the wife must defer to receive it.
In her case, both plans offer a paycheck-by-paycheck true-up. The first plan matches 50% of deferrals up to 5% of compensation, and the second matches 100% of deferrals up to 3% of compensation. Given that, it seems to me like it should be possible to get both matches, right?
As long as any refund doesn't take her deferral under 5% of compensation under the former plan, and/or 3% of compensation under the current plan, I don't think it will be a problem.

When you say "paycheck-to-paycheck true-up", do you mean she receives a match on a pay period basis, and then the amounts are trued up at year end?
During every pay period, they ensure that she has received the entire match she is entitled to YTD. What this means in practice is that even if she maxes out the 401k early in the year, she keeps getting small matching contributions each and every pay period due to the true-up.

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Re: Intentional 401k overcontribution to get new employer match

Post by jane1 » Thu Jul 02, 2015 1:45 pm

Check if the new employer allows after-tax 401k contributions and you can get a match against those. These contributions do not get counted against the annual 18K limit. That has worked for us.

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Re: Intentional 401k overcontribution to get new employer match

Post by jane1 » Thu Jul 02, 2015 1:59 pm

CFM300 wrote:Thanks for the clarification. I guess I should have been able to figure that out.

Her salary must be at least $170k in order for a 3% match to be worth more than $5k. Nice problem to have.

Unfortunately, I have no advice regarding undoing the previous 401(k) contributions. Best of luck.
CFM300, 170K would be compensation for the part of the year at new employer. Not necessarily annual salary, which could be much higher.

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Re: Intentional 401k overcontribution to get new employer match

Post by nordsteve » Thu Jul 02, 2015 2:03 pm

I dealt with this for four years when I had two employers, one a governmental employer who had a mandatory 403(b) contribution with match, and one a private sector employer with an optional 401(k) plan with match. The private sector employer was unwilling to enter a limit in their payroll system lower than the statutory maximum on my payroll record.

I requested and received overcontribution refunds each year from the private sector employer. Note that the refund of your excess deferral is taxable in one year and the disbursement of earnings on the excess deferral in the next year.

The refunds caused the private sector employer's match to be reduced.

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Re: Intentional 401k overcontribution to get new employer match

Post by Alan S. » Thu Jul 02, 2015 2:18 pm

Here is the applicable IRS Reg that addresses designated Roth excess deferrals that remain uncorrected by the 4/15 deadline:
(iv) Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income.
In other words, when the Roth 401k is distributed, the excess and earnings on the excess will be taxable and not subject to rollover to a Roth IRA. If employee does not report the excess to current employer, then the employer's only source of information would be the IRS, after IRS computer collects the Box 12 W-2 deferral data. This is not likely to occur prior to the deadline. The plan would/should make the accounting adjustments to the designated Roth balance that would eventually show up in the 1099R when the designated Roth was distributed including a direct rollover attempt.

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nerdinvestor
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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Mon Jul 13, 2015 11:52 pm

So, got some more information. The old employer's plan is willing to withdraw any excess contributions, and the new employer doesn't care what we put down as "already contributed in 2015" when signing up for the plan. It appears the match calculation is done by the old employer's payroll department, and based on my understanding of the formula, none of the first employer's match will be removed as long as we leave roughly $6k in the plan. That leaves more than enough room ($18k IRS limit) to get the full match at the second employer as well.

The question remaining at this point is what to do about the fact that the original plan's contributions were Roth, but we wish it had been traditional since our tax bracket is high right now. It sounds like withdrawing excess contributions from a Roth plan has unique tax treatment. I don't really understand the implications of the previous post - can someone help break it down? Do we need to worry about any complications as long as the excess is removed by the 4/15 deadline? How bad is it if they aren't removed in time?

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Re: Intentional 401k overcontribution to get new employer match

Post by Alan S. » Tue Jul 14, 2015 2:11 pm

nerdinvestor wrote:So, got some more information. The old employer's plan is willing to withdraw any excess contributions, and the new employer doesn't care what we put down as "already contributed in 2015" when signing up for the plan. It appears the match calculation is done by the old employer's payroll department, and based on my understanding of the formula, none of the first employer's match will be removed as long as we leave roughly $6k in the plan. That leaves more than enough room ($18k IRS limit) to get the full match at the second employer as well.

The question remaining at this point is what to do about the fact that the original plan's contributions were Roth, but we wish it had been traditional since our tax bracket is high right now. It sounds like withdrawing excess contributions from a Roth plan has unique tax treatment. I don't really understand the implications of the previous post - can someone help break it down? Do we need to worry about any complications as long as the excess is removed by the 4/15 deadline? How bad is it if they aren't removed in time?
Since the old employer's 401k elective deferrals will evidently be withdrawn with allocated earnings, it makes no difference if the contributions were traditional or Roth since the removal will offset the tax effect of the original deferrals. Since these were Roth and there was no tax benefit for the deferrals, the removal will NOT be taxable, except for the allocated earnings. But it is critical that this be requested in order to be completed by next 4/15 to avoid the situation in the prior post. Since the deferral was Roth, it was after tax but for the removal to also be after tax (except for earnings), it must be completed by 4/15.

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Re: Intentional 401k overcontribution to get new employer match

Post by nerdinvestor » Tue Jul 14, 2015 2:21 pm

Thank you! This was very helpful.

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