IRA Rollover
Individual retired in 2019 – subsequently rolled her 401(k) into a T-IRA
Her (former) employer has since notified her that the company 401(k) plan has failed non-discrimination testing – I was not informed which “test(s)” was/were failed
Her former employer is requesting the “excess” be returned to the plan
Is she required to return the excess?
If so, how is it reported?
What about taxation? earnings?
Thank you
Permalink Submitted by Alan - IRA critic on Sun, 2020-03-29 18:52
She should have been provided a detailed explanation. Possibly (just guessing here), she rolled out company matching contributions that would otherwise be vested, but the plan then failed the test and wants the portion of the disallowed match to be returned to the plan. Along with that, additional amounts that turn out to be excess contributions probably do not have to be returned, but the plan may be issuing a corrected 1099R for 2019 in which the amount eligible for rollover is reduced and another 1099R would indicate a distribution subject to tax. That would create an excess IRA contribution that would have to be removed with allocated earnings (most likely a loss by now). She would be able to keep a portion but would have to return the portion to the plan attributed to the disallowed match. In other words, a match on an ineligible contribution due to test failure must be returned to the plan since the plan cannot match an ineligible contribution. As you can see, this is complex and why she should receive a full written explanation from the plan. She should not return any funds until they provide sufficient detail. If a 2019 1099R will be corrected, she will have to amend her 2019 return if already filed. If she has not yet filed 2019, she now has until July and may need that extra time.