Last paycheck 401(k) contribution failed to get rolled over?
My daughter quit her Oakland job to move to her university for in-person instruction this year. After she quit, she called her old employer’s 401(k) custodian, The Principal, & requested direct rollover of her entire 401(k) balance to a Rollover Tr IRA at Vanguard. The Principal sent a check to Vanguard before they recorded the very last paycheck’s contribution in the amount of < $200. Now they tell her that last amount must be distributed out to her and cannot be rolled over since the amount is "too small". She wants to keep it in a retirement plan & doesn't want to be forced to pay the early-distribution penalty. The Principal states their policy "If the balance is less than $200, it is processed as a cash distribution & cannot be a direct rollover."
Can they do this? Do we have any recourse?
I know it’s just $200, but this young person is motivated to be saving for her retirement, via 401(k) & rollover, and now her money is not just being refunded & taxed, but also penalized!
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-14 01:57
In this situation, most plans would automatically do a follow up direct rollover to the IRA. But since this custodian will not oblige and will only make a distribution probably with 20% withholding, your daughter will be able to do a 60 day rollover to her IRA but will have to make up the withheld amount. This will avoid tax and penalty and the withheld amount will be recovered when she files her 2021 return. Note that since the distributing plan is not an IRA, the one rollover limitation does not apply.
Permalink Submitted by Maria Ku on Thu, 2021-10-14 02:05
Oh, thank you so much – I forgot to think about this possibility!