401k Plan Match Excess Forfeit

Submitted by Julie Brangenberg on Tue, 2020-11-24 14:59

Hello, I have a client who rolled over her 401k from her previous employer. It took her a couple of months to roll her money over. After the rollover, she received a letter from them saying that she needs to return part of the employer match because it is a plan match excess, which she needs to forfeit. She said that the company knew this when she rolled the money over, but drug their feet. Now that it’s rolled out of their plan, they want part of it back. Does she need to return the excess? Will she be taxed on it if she doesn’t? What are the steps for returning it? Thanks.



Submitted by Alan - IRA critic on Tue, 2020-11-24 16:40

  • Typically, the company will revise the 1099R, or split it to show the allowed rollover on one form and the excess amount which is not rollover eligible on the other 1099R. That will trigger tax on the excess amount and also create an excess IRA contribution for the excess amount that must be removed from her IRA as an excess contribution with earnings.
  • Therefore, even if she does not return the excess to the plan, there will be taxes due. The choice to return the funds is problematic since some plans will let it go and others will aggressively pursue collection. If the funds are returned she may be able to file a “claim of right” deduction for the year repaid (Sec 1341) to offset the double taxes if the excess amount exceeded 3,000. If the excess (amount returned) is under 3000, no deduction is allowed.

Submitted by Julie Brangenberg on Tue, 2020-11-24 17:06

If she returns it, will it avoid tax reporting and taxed owed?

Submitted by Alan - IRA critic on Tue, 2020-11-24 20:04

  • No, she will still be taxed as described in the first bullet point above on the distribution of the excess and on any earnings returned from the excess IRA contribution. But if she returns the excess to the plan and that amount is over 3000, then she could use a claim of right deduction on the return for the year the funds were returned that would approximately offset the taxes paid in the first bullet point. This is tricky to report on Form 1040.
  • If she does not return the funds to the plan, then she cannot file a claim of right deduction for having to return the money. She will be out the taxes, but will still have the excess match money which will be more than enough to pay those taxes and still have funds left over.

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