Incorrect 401K Rollover Amount

Submitted by Kevin O'Hearn on Mon, 2022-06-13 13:16

Hello,

I have a client that received a direct rollover from their 401K plan on 04/23/21 for $112,000 that went into their traditional IRA. The client received a letter from their old employee due recent plan testing it was determined that the client was not eligible to receive the rollover and now needs to return $116,500 made payable to the employer.

I was just thinking that a return of excess transaction would correct this but is there any red flags on the fact they want the client to return a higher amount than they received.

Any feedback would be greatly appreciated. Thank you.



Submitted by Alan - IRA critic on Mon, 2022-06-13 15:23

  • Was this a total distribution of the plan?  Normally, the plan should have determined the amount to be returned to the client by 3/15, before the rollover was distributed. My guess is that the market drop from 1/1 to 4/23 explains why the amount returned is greater than the balance on 4/23.  Client should request a complete accounting for this bill before returning anything. Client may also know from prior years how the plan handled testing failures for HCEs.
  • One major question is why is the plan asking for return of this large amount. Matching contributions on excess contributions should be returned to the company, but the remainder is the client’s money and should not be returned. Those funds would however now be taxable in 2022, and if the math checks out, the 1099R for 2022 would reflect a taxable distribution, but no penalty.
  • This would make the entire IRA rollover an excess IRA contribution, which must be removed from the IRA. More market losses since April would be reflected in the IRA net income calculation, so client would get back less than 112,000 from the IRA custodian. This corrective distribution should not be requested until it is clear that the full amount is actually an excess contribution. This return from the IRA should fund whatever turns out to be the correct amount to be returned to the plan, which I think should be limited to matching contributions being clawed back.
  • In short, the plan appears to be in error in requesting the return of this large an amount. They may not realize that only the disallowed matching portion is their money. The rest is client’s less market losses, but will be taxable, offsetting much of the pre tax savings from making these contributions in 2021.


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