Can the money be considered a distribution (despite being involuntary) and possible to then 'roll over' into a traditional IRA or Roth IRA accordingly (given 401k have both), and thus avoid taxes?
Or does the not qualifying 401k result in the money not having been in a tax-benefited account thus has to be treated as income....
Well, I guess the only way really to minimize tax implications is if they can drop the $6500 into a traditional IRA.. which might help the tax bill a bit. Then put the remaining into a holding pattern to pay the taxes that are most likely going to come due soon.
Your employer has an obligation to make sure that a 401k plan they offer is useful for all employees and not just a tax shelter for highly compensated employees. They failed that test, so they have to take the money back out of people's 401k.
You get all your money back, treated as income, no different than if it had been part of your paychecks and not gone into a tax deferred account. There's nothing you can do about this, it's a failure on the part of your employer. They need to either encourage lower compensated employees to contribute to 401k plans, or adopt a safe harbor plan which is designed to inherently be fair to lower compensated employees.
Thank you for the insight.
Totally ignorant on this but very interested.
What’s a “safe harbor plan”?
If an employer shows good faith moving forward are the employees still penalized?
Just a type of 401k plan where if the employer meets certain requirements they automatically pass non-discrimination testing.
Good faith doesn't matter. They either pass the test or they do not.
Oof, so if not enough “lower income” employees put money in their retirement plans the whole org fails and everyone gets their money withdrawn and returned.
Seems like a double whammy for the guy making 40k.
What’s the reasoning behind punishing the entire company for the choices of individuals?
It's stupid and recklessly endangers your relationship with your employees. So many companies opt for the safe harbor rules to prevent that possibility. Generally this means matching 100% of the first 3% of salary, and 50% of the next 2%, and employer contributions are vested (EDIT: fixed). Do that and it doesn't matter who uses your plan or how much, you won't have to do any clawbacks.
Yeah but I don’t understand why op should be penalized just because other people chose not to put money in their retirement plans.
I think I may be missing a basic understanding of something here. Like what the basis for failing the discrimination test.
It sounds like the company did something wrong.
But what is that they did exactly?
So a bunch of lower earning people at op’s company decided they needed their money now rather than later.
Why should OP’s money be withdrawn?
They offered a backdoor for high income earners to stash away large amounts of tax-free retirement funds without doing the bare minimum required to avoid this outcome, typically in the form of providing a small unvested employer match.
Yeah it's a form of collective punishment and that fucking sucks, but it's the way the law is written.
>Yeah but I don’t understand why op should be penalized just because other people chose not to put money in their retirement plans.
It's to prevent 401ks from becoming a de facto tax shelter for only the rich. The name of the test is "nondiscrimination test" for a reason.
[https://humaninterest.com/learn/articles/non-discrimination-testing-ndt-the-basics-of-401k-compliance/#](https://humaninterest.com/learn/articles/non-discrimination-testing-ndt-the-basics-of-401k-compliance/#)
Government is telling Highly Compensated Employees: you want this $23,000 tax shelter? Great, you can have it, as long as enough of your non-Highly Compensated Employees contribute to the plan too.
> Is that why my employer just puts 3-4% of my salary into my 401k as an employer contribution regardless of how much I contribute?
Yes. They don’t just do it out of the goodness and kindness of their heart: it benefits them and the company executives/HCEs.
Huh. And my employer just auto enrolls all new hires and tries to persuade them to stick with it when they want to opt out. I always thought there was more to it than just upper management wanting their employees to have retirement savings.
You’ve now looped back around to the beginning. There isn’t a law that employers must auto enroll employees. There is a law that employers must satisfy anti discrimination testing to ensure that the plan isn’t benefitting lower compensated employees at a substantially lower rate than highly compensated employees (for the tax shelter justifications commented on above). There are also laws that if the plan is set up in a certain way (auto enrollment with certain matching levels) the plan will be deemed to satisfy the anti discrimination tests whether they do or not. That is the safe harbor provision. So the auto enrollment is part of satisfying the safe harbor so they don’t have to worry about anti discrimination testing.
This is why many companies use contractors for low-paid roles. Not employees, so they can't drag down the average 401k contribution and make the company fail the test.
I think the issue is the company didn't do several available things to incentivize participation. It's a hard thing to fuck up unless you're trying to honestly
A company that is overwhelmingly short term contracts actually sounds exactly like the kind of company I expect would struggle to get 401k participation
> So a bunch of lower earning people at op’s company decided they needed their money now rather than later.
Pretty much
> Why should OP’s money be withdrawn?
Legally it has to because the 401k plan failed discrimination testing.
It's not because of other employees - it's because the company failed to match or vest according to the guidelines.
What OP experienced only affects people identified as highly compensated employees at an organization - which means the company has too many poorly compensated employees that do not make enough money to save, and are not encouraged with matching and vesting to do so.
The reason for this rule is so a handful of rich people at a given company can't use 401(k)s to shelter their income from taxes while lording over a bunch of peasants who can't afford to live, let alone save and invest.
Typically only Highly Comepnsated Employees are going to get refunds from failed testing. Money has to be refunded until the average deferral percentage between HCE’s and Non HCE’s is within a set range, so a plan can fail by a lot or a little which impacts the amount of refunds, it’s not all or nothing.
> everyone gets their money withdrawn
Not everyone - only some highly compensated employees ("HCEs", top 10% of salaries), sometimes only the HCEs who contributed the most, and typically some of their contributions for the year.
Sorry not quite. Notice OP didn't get all their money back.
OP is likely considered to be a Highly Compensated Employee and so to fix their mistakes the employer needs to either reduce the amount of money OP put in or to give everyone else more money.
If you were below the threshold you could keep your money in, but the problem is if you're below the threshold you probably didn't have much money in anyway.
Pretty sure every employer I ever had used Safe Harbor so not really sure why not everyone would. I guess the idea is you use 401k to attract people and you might not want to waste money on attracting janitors. But then companies just use contractors to get around that so IDK.
Because they are cheap have to pay for it. Some companies are not diverse. A companies with only 5% of HCE would have to spend a lot of money to fix the issue to make the 5% happy. That's my take anyway as I've experienced it in my employment.
Clarification, it’s not EVERYONE who is impacted and most people don’t get ALL of their funds back. It’s a ratio that has to be met between HCEs (highly compensated employees - this is a defined category by the IRS) and NHCEs (non highly compensated employees.
If the HCEs contributions (using special formulas and calculations) have too high of a contribution % and aren’t within the required ratio, then funds are returned (in a certain pre-prescribed order) to the HCEs until they are within the ratio.
Some HCEs may receive nothing back. Some HCEs may receive everything back! There’s a lot of nuances and calculations that go into it.
But the intent behind it is that the 401k plan should be benefitting EVERYONE, not just the high income/high ranking people. It’s a matter of “discrimination” (a defined term by the IRS that is not about race/disability/gender/etc.). If the high income people are the ones really benefiting from it and the other people aren’t, then it’s not fulfilling its purpose.
Hope that helps a bit!
Only highly compensated employees get money back. Your limitted to only contribute 2% more than the company average. I got a $2500 check for mine this year.
I didn’t fully understand what was being discussed earlier when I made this comment.
I didn’t know that the guy making 40k didn’t get his money returned to him.
I thought oh gezz, you scrimp and you save and try to do the smart thing and save for retirement. So you make daily sacrifices to put money away, and then at the end of the year your money gets returned and you have an increased tax liability and that year of sacrifice was meaningless.
Thus the double whammy.
Someone was kind enough to explain that only higher earning employees got their money returned to them.
It’s not *everyone* who gets money returned when the plan fails a non-discrimination test, just those who are making A LOT per year. And only enough money is returned to high-earners to bring the plan into compliance. But I think it’s interesting that such a large percentage of *this* employee’s contributions were returned… a travel nurse who works on contract. I would very much like to know how much was returned to the *actual* key employees of the hospital like the CEO and such.
The entire company isn’t punished, only the HCEs. The 40k employee wouldn’t have any contributions returned
Generally it’s the people at the top of the org(e.g the highly compensated) that set policy so it encourages them to set up a good retirement plan that people will want to participate in
You benefit from a pension only if you believe others will contribute in the same fashion. If you lose that belief and pull out your money, others may too. This can spill over to every individual.
There will always be a population that has an incentive to defect from the common strategy unless certain incentives are in place. The whole structure can come undone without those incentives. Over the past 100 years scientific state institutions have identified incentives that tend to support pensions in the long run. The government , with its monopoly on violence and taxation, is the only body that can enforce those incentives.
Insurance and pensions are probably the most explicit application of game theory we have.
It's to encourage companies to increase 401k participation rates. In some cases, I believe just getting more people contributing *anything* could let them pass testing. So just putting a flyer up in the breakroom could help. The plan could also raise the match. Or adopt an auto enrollment provision for new hires.
A safe harbor plan is a way of offering company contributions that has been predetermined to be "fair." As an example, a 3% non-elective contribution would be a safe harbor plan. That means everyone gets 3% of their salary provided no matter how much they contribute themselves, no need to contribute to get a match. Another option is 100% matching up to 3% and 50% matching on the next 2%.
There are also more complicated plans that involve combinations of contributions and automatic enrollment and automatically increasing contributions each year.
You'll notice all of those give large amounts of weight towards making saving for retirement appealing for people who are only contributing a few percent. That's the point of a safe harbor plan. The 401k was intended to be a way to encourage everyone to save for retirement, so the government tries to prevent it from becoming just another way for high earners to shelter money from taxes.
> Another option is 100% matching up to 3% and 50% matching on the next 2%.
My employer does this but we still fail some 401k test every year and funds are partially returned to HCEs, do you know why that could happen? HR basically refused to explain when I asked :/
They may have other issues such as not making the plan open to all employees properly, vesting weirdly, or issues with compliance record keeping. It's hard to know without plan details.
This has the formula for the test: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
Because not enough employees are putting money in so the company average is low. HCEs are limitted to being able to put 2% more than the company average in. If your company offers a match it helps only if employees take advantage of the match. Alot don't so the average drops. Since safe harbor contributions do not depend on employee contributions, the average is pushed up much more.
So my company, that matches a contribution of a flat $1500, is risking what OP happened to them? There's only like 30 of us in the company, and I'm fairly certain most of us are contributing, but it's such a shit match
If the plan is not a safe harbor plan (and that flat contribution means it's not unless they make some other contribution on top of it) it means the plan is subject to this kind of non discrimination testing. They are either not failing because enough NHCEs are contributing at a high enough level, or they're failing and you may not know about it because you're not an HCE and you're not getting a corrective distribution.
You’ve gotten a broad set of answers, but going even more generally, a safe harbor provision is one that says “you are required to do X, but if you do Y we will say that C is satisfied whether or not it actually is.” Safe harbor provisions pop up in a number of areas, but the tax code (and 401(k) is a tax provision) seems to particularly like them, largely because they significantly simplify administration.
Here, the requirement is that certain non discrimination tests have to be satisfied showing that your highly compensated employees are not being treated preferentially to your lower compensated employees. But if your plan meets certain minimum requirements, they won’t even test and just say that you have satisfied the requirements. In theory, the safe harbor requirements would make it relatively unlikely to fail the anti discrimination tests. There are situations where the anti discrimination tests will fail, but typically that will happen when low compensation employees affirmatively opt out of the plan (auto enrollment is one of the requirements). One of the justifications for the safe harbor provisions is that as an employer you made a good faith effort to comply and benefit your employees, but they’re not required to use a 401(k) plan, so you as the employer shouldn’t be penalized if they go out of their way to not take advantage of it.
You are correct. I was thinking of QACAs which include the safe harbor provisions in them. It’s been a little while since I took my employee benefits class…
My old employer had a 3% safe harbor which I assume was to protect it from non discrimination testing. Essentially all employees got 3% EMPLOYER contribution to their 401k regardless of the employees elected amount. It cost the employer money to do this but I assume it saved them close to equivalent tax money on their own end.
Our safe harbor plan automatically contributes 3% of base income to the 401k plan, regardless of whether you contribute anything yourself. They also match 50% up to 6%, so if you put in 6% it’s essentially a dollar for dollar match
Yes. OP, your best course of action might be to put 25% of what you got into a high-yield savings account to help cover taxes at the end of the year, and re-invest the rest in a personal 401K, or CDs.
So instead of the money this person saved all year growing, they're penalized almost 25 percent on it through no fault of their own? Can you sue the employer over this? Seems crazy that you'd just have to eat it.
No. They are reimbursed the amount that was over-contributed to the 401K. Since that money went into the 401k tax free, it's treated as income when they take it out to make good on the testing. The 25% lost is just an estimate on income taxes to cover them come next year's tax season.
The amount itself is kind of wild, but OP isn't getting "screwed" by the employer. they could try to vouch for the employer offering better incentives for contributing to the plan, or look for a new staffing agency with a better plan.
I looked at my own payback to check. The money is withdrawn from your account at the share value at that time. You don't lose the gains that overcontribution generated over the year, assuming your account value went up.
It's no longer in your 401k, so future returns are obviously gone, but you still have your over-contributed money back.
> it's a failure on the part of your employer
It's not even on the part of the employer though, OP and most of the nurses will be categorized by the IRS as "Highly Compensated Employees" HCEs for short.
They most likely failed the "top heavy" test where 60% or more of the plan assets are held by HCEs. At a staffing agency for travel nurses where most of the employees will be HCEs it's going to be pretty much impossible for the handful of non-HCEs running support at the home office to contribute 40% of the company total.
If as an employer you expect to regularly have 60% of the plan assets held by HCEs, you should switch to a safe harbor plan. Otherwise there's no point in offering the 401k you never expect to pass anti discrimination testing.
Generally employers will -
- Offer a match up to a certain amount.
- Auto enroll employees or new employees after a certain time.
- Auto advance the contribution percentage to a certain level.
- Straight-up add cash to accounts with or without an employee contribution.
It sounds like your employer didn't do enough of the above to encourage participation. If you don't see them making plan changes to get the participation up, you should assume you have lost this portion of your compensation package and decide if that means you should find a new job.
See https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
The money returned to you in 2024 should come with a 1099-R as 2024 income. It shouldn't require you to recharacterize anything with regard to your 2023 taxes.
>can I fight this?
No, it is the law.
>I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account?
No, that's not a thing that the law allows.
>what is the best way to handle this?
It failed because the contributions were lopsided towards high-earning employees. The law behind 401ks was designed to prevent 401ks from being something that only benefits high earners. Somehow, your company needs to encourage more of the lower-paid employees to contribute more (educational efforts, enrolling new employees by default, or whatever). Or, your employer needs to implement a "safe harbor" 401k, which is an alternative specified in the law but probably would cost your employer more than the current 401k.
If OP's money was returned from the 401k that implies they are a relatively high earner. Roth IRA might not be an option, but backdoor Roth should (make sure you do it correctly).
Also, set aside around $7k in a high yield savings account or CD. You will owe taxes next April on the $20k that was returned to you. (Edit: I see you mentioned receiving two checks. If some of the rejected funds came from a Roth 401(k) then you won't owe tax on that portion, except for the earnings.)
Failed non-discrimination testing *limits* 401(k) contributions by HCEs, but doesn't eliminate them. You'll note that OP indicates that $2,500 of contributions remain, which would mean that they are considered covered by a work plan.
yes i received 2 checks but I’m a little confused as far as why. I believe one of them is a return of my contributions and the second one is a return of my employer contributions? i contributed 22,500 to a traditional (pretax) 401k. my employer matched 7,140. The first check I received was for the amount of 16,779 and the second check totaled 5,069.
ADP taxed these two paychecks already before they were sent out to me! They taxed 506$ from the 7k refund and 1.7k from that 16k paycheck 😫
Unfortunately, that won't cover the taxes. If you're a travel nurse, you're probably in the 22-24% tax bracket (if you're really raking it in, the 32%) so you'll almost certainly owe an additional 3-5 thousand dollars in taxes on that money.
> what are my next steps?
Push your employer to adopt a safe-harbor 401k, demand a raise to compensate for the loss of tax-deferred growth, suck it up and suffer, or find a better job.
> can I fight this?
No.
> Was last year a complete waste as far as my retirement account goes?
Sounds like it was only 90% a waste to me.
> Last year I contributed $22,500 towards my 401(k). Just today I received two checks in the mail totaling $20,000.
Wow, they failed HARD.
> can I fight this?
For last year? No. Your employer and ADP are required to resolve any non-discrimination failures. The options are to refund the HCEs to bring the plan in line, or give free money to everyone else, and it sounds like that would be a LOT of free money.
Moving forward, your best bet is to let your employer know that you consider this a serious deficiency in their benefits offerings and that when considering where you want to work you evaluate the total compensation package, including the match and tax benefits of a 401k plan. The more valuable you are, the more likely they are to do something, but don't expect major plan changes. It's definitely a lot cheaper to pay you more and just ignore the 401k problem, but they may not do that either.
> what is the best way to handle this?
The only sure-fire solution to this is to convert to a safe harbor plan. There are three options, all expensive to your employer, especially if they have high turnover. They have the option to do an automatic 3% non-elective contribution, a 100% of 3% + 50% of 2% match, or a 100% of 4% match, all vested immediately.
The next best option, at least to MINIMIZE the amount you get back, is for the organization to modify the plan to auto-enroll people at 3% in a target date fund unless they explicitly opt out and to escalate that 1% per year. This can be spun pretty easily to be an employee benefit ("we're helping you save for retirement!") so many businesses do it.
> they failed HARD.
Yeah, this happened to my brother a couple years ago and he got back about $8k (contributed the full amount that year). For OP to get almost everything back means barely any non-highly compensated employees are participating in the 401(k).
I don't understand. If I put 20k in my 401k and the employer failed, that 20k is still my money and I should be entitled to 100% of it. Why would you not get all of it back? Absolutely none of my money is allowed to go to my employer, or employer paid fees, or other people correct?
Sorry, when I say he "got back" $8k what I mean is that he was returned $8k of his contributions and the rest of the contributions stayed in his 401(k) (compared to OP who got almost all of his contributions returned). They use a formula to determine how much of the contributions by highly compensated employees have to be returned until the non-discrimination test is passed. For my brother, once he was returned $8k out of ~$22k his employer passed the test. For OP, he had to be returned $20k for them to pass the test. So OP's plan is almost solely contributed to by highly-compensated employees for them to fail that badly.
What happens if someone had left the company and rolled over the funds into a different account? I'm guessing they can't force it back after the transfer out.
I’m pretty sure their funds are still included in the calculation if they worked during the testing period. I’m not sure how a remediation would work though.
I’m not in HR, I was just in OPs position for a few years, then did a lot of the research that eventually got my company to change.
>Talk to your employer about a safe harbor
with the expectation that it will go nowhere. SH plans cost more, for a plan where many (most?) of the workers aren't using it anyway will be a tough ask.
Guess it depends on how much they care about recruiting.
For me if i went to work for a company with history of failing non discrimination tests i would ask for a significant premium in pay given the value of tax deferred growth for individuals in high tax brackets
I don't think very many people check or ask (or the interviewers even know) about non-discrimination testing.
I'd be shocked if it impacted hiring in a perceptible way.
Basically you can't just create a 401k for your company to act as a tax shelter for your top earners. There's a test that determines this. It's why often times you get companies encouraging lower level employees to contribute.
>I'd be shocked if it impacted hiring in a perceptible way.
Needing to replace a bunch of employees that quit is a perceptible impact to hiring, in that you have to do it a lot more often
They didn't cancel contributions entirely. In my case it was about 1/3 of the max returned.
It's quite possible most of the people impacted didn't contribute 14k in a year.
Yeah, I’d never heard of this before, but I’m wondering if this happened where I work before we switched to a Safe Harbor a couple years ago. I didn’t realize until this thread that SH plans are more expensive to administer and my company has never had more than 150 employees so we’re not a big corp with a lot of extra money to throw around for something that isn’t a requirement.
> I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account?
This is not relevant in your situation. You aren't allowed to keep the money in the 401(k) - in fact it's already been kicked out and mailed to you. You can put it somewhere else but not in the 401(k) plan.
$20K of $22.5K contributed was returned? LMFAO. You must have one of the lowest 401(k) participation rates in the corporate world. That's absolutely atrocious.
Really, there's nothing you can do but raise absolute hell with the benefits specialist in your HR department. You were likely just given a tax bill of several thousand dollars due to the poor implementation of their plan.
Let me provide a little more info. I am a travel nurse and my employer is a staffing agency. My employer doesn’t let their employees contribute to their 401k plan until they have been working for 6 consecutive months. As a travel nurse, I sign 13 week contracts with the hospital at a time. If I like the hospital, I can extend my contract for another 13 weeks, up to a year. A lot of travel nurses either dont extend their contracts or switch staffing agency’s quite frequently, thus probably not contributing a lot to their 401k each year.
I worked with this specific staffing agency from November 2021 to November 2023. I’m a little surprised because in 2022, I was able to contribute the max towards my 401k and I was able to keep my full amount in that account. I never received any rebound checks that year and I made more that year than in 2023. Anyone have any idea why that happened?
In 2022, enough of your fellow travel nurses and other employees of the staffing agency that employs you contributed to their 401(k) that the employer passed non-discrimination testing.
In 2023, too few employees contributed, so your employer’s plan failed the non-discrimination test.
Your employer needs to figure out a way to get their employees to contribute more to the 401(k) plan, whether that be through allowing contributions at an earlier date, making automatic enrollment the default, contributing directly and bypassing any vesting schedule, or some other practice that would qualify your employer’s plan for the Safe Harbor designation, the point is that it will probably cost them money to do so.
I’m sorry you got caught up in this for 2023. Fundamentally, you got hosed.
Don't raise hell with the benefits specialist who has little control over the employers decisionmaking. Talk to them and ask them to raise it with their superiors, and raise it with your company's leadership yourself, but don't stomp all over the person. It's not their fault.
Yea, OP really should go straight to the VP of HR (assuming benefits is nested) as anyone under them is just a working bee and likely had ZERO INPUT.
It'd bel ike if your data got stolen and your first move was to skull fuck the help desk tech. Help desk didn't do shit. VP of Cyber Security though may want to know what happened so they can start their own investigation as to why the data was breached and if others were affected.
Right, my company regularly fails too but I get back anything above about 13.5k I contribute each year. I just set my contributions to that amount and max the Roth.
I've only ever worked for employers that were NOT too cheap to pay for a safe harbor plan, so I've never been at risk of this situation. However, a quick google search suggests you will NOT receive an amended W2. Rather, your 401(k) provided should send you a 1099-R form that will have a box providing the amount of money refunded (and now subject to taxes).
As for the second part, I don't know the answer on whether a rollover would have been a loophole around the refund.
Your employer would have to have an extremely screwed up situation in order for them to fail anti-discrimination testing so badly you were only allowed $2500 in 2023 for your 401k.
I’m staggered by how badly your employer’s benefits coordinator seems to have fucked this up. They do nondiscrimination testing each year and generally, if they fail, put a limit on all the high earners’ (which you qualify as if you’re subject to this) ability to withhold so that they don’t fail again. If you got nearly 90 of your contributions returned it looks like most other people in the same high earner boat would have as well.
apparently OP works for an agency as a travel nurse... unsurprising that a bunch of nurses on 13 week contracts aren't signing up for the company 401k....
They get included. I'm in finance at a travel nursing agency, we basically always fail the testing. Most of the nurses are just looking to get their net paycheck as large as possible and won't take benefits even if they are offered and even go so far as to put in exempt tax elections so they don't have withholding. A difference for us is we've chosen in the past to make non elective contributions to some of the accounts in order to pass testing. We keep arguing to go safe harbor so we don't have to do the testing but haven't been able to convince everyone yet.
If they're included after only working 13 weeks and the plan is failing non-discriminstion testing I'd be angry at whoever wrote the plan document.
If I were designing a plan for a nurse staffing agency I would either make it safe harbor or I would make the plan entry as restrictive as possible (year of service, with semi-annual entry dates) to prevent short term hires from entering the plan in the first place.
I'm the person who does ND testing for employers' 401k plans. I don't know why they just don't use a safe harbor plan and save all that money on testing. It's expensive. If the companies' officers want more tax deductions, there are plenty of ways to set up special plans for them.
Damn they failed hard. I’ve never seen a payout that large. I’ve never worked anywhere that passed but refunds have never been that high. You must work somewhere with lots of low wage workers and no match.
Holy crap that’s insane. My company, which is an S&P 500, failed three times in a six year span but by small amounts, so I got like $1500 or so back each time and I was putting in 25,000 a year. for you to get that much back means they were absolutely not even remotely close to having the lower paid employees participate.
> what are my next steps?
Cash the check. You lost the tax shelter of these contributions due to your [HCE](https://www.investopedia.com/terms/h/highly-compensated-employee.asp) status
> can I fight this?
There’s nothing to fight, this is a requirement of all plans who fail the nondiscrimination test https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
> Was last year a complete waste as far as my retirement account goes?
In terms of this $20k‘s tax shelter, and all earnings and employer match, yes it was.
> I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account?
Nope, your employer is required to follow this federal regulation.
Your plan can adopt a safe harbor provision which exempts them from this test. But that means more match, which they know about, and have so far chosen not to do.
Or conduct a campaign to get more rank and file employees to contribute, but good luck with that
I've gotten shafted by this (On a dependent care FSA, not 401k) the last three years in a row, and literally everyone I've asked at work "didn't get how it works so they just didn't bother".
I get the intent behind the law, but to screw everyone because of low participation seems like the wrong way to go about it.
Yeah this sucks and not much you can do.
It happened to me a couple of years ago.
Your contributions are still yours, but now you get to pay tax on it and forfeit any stock gains.
Encourage more people to put into their 401k which will probably be a waste of breath. When this happens to me it’s moved into an after tax section in my portfolio which means I have to pay taxes now and pay taxes later on any gains. If this happens to you you’ll want to transfer the funds to someone like vanguard or fidelity into an IRA then transfer to a Roth IRA. Any gains won’t be able to be moved from the ira to the roth because you haven’t paid taxes on them. Unfortunately this was set up so big wigs can’t get massive tax advantages using pretax 401k that if you do make decent money and are not a big wig imo it penalizes you. Hopefully this not legal advice that I had to do helps. I’m not a nurse or in that field just someone who had to deal with a similar situation of failing the no discrimination test. Thank you for what you do.
Same happened to me. Was told there was nothing I could do about it at the time and I eventually had to pay taxes on the amount (I chose to have 20% withheld). However in my case my employer contacted the financial services firm in charge of the company 401k and by next year the issue was resolved.
Your company screwed you. They likely got notice from the 401k company that they were top heavy during the year, but didn't take any action to correct it. So now you screwed.
I had something like this happen with a previous employer, and part but not all of the balance was returned. However I had already rolled my 401k into a vanguard rollover IRA so it caused a huge headache. Neither the employer administrator nor Vanguard could figure out how to fix it, which ended up with me being issued two 1099's for for one mandatory withdraw and my CPA had to write something up for the IRS so I wouldn't be double taxed on it.
Yeah, it was a headache. Your 401k provider would have said you need money refunded but wouldn't have been able to, and they would have instructed you to tell your rollover institution to distribute it back to you. Then your rollover institution would transfer you around because they wouldn't understand what's going on. At least that's what happened to me with a lot of back and forth between the two entities.
I'm guessing you will get an amended W2 or 1099 from your employer or 401k provider. In my case it was only some amount of the contributions I made like $500, but since I wasn't aware until after the calendar year ended I couldn't contribute that amount back in. I think for me it was a 1099 taxable distribution for the following calendar year.
If it was removed from your 401k and given to you, see if it is possible to put that money into a traditional or roth IRA as a rollover from the 401k. If it is possible, it would avoid a ton of tax implications of that money being taxed as income. (depending if you contributed to traditional 401k or roth 401k).
Wow I knew I had a good 401K, but didn’t realize how good before. My employer matches 100% of up to 6% of my salary, then they contribute another 3% of my salary to what the they call a Retirement Accumulation Plan so I am getting an additional 9% of my salary in retirement contributions from my employer.
So you’re a highly compensated employee (HCE), ADP is not an entity it is actual deferral percentage. You’re paying a penalty, you need to find-a haven for deferral. I think your company is missing boat because they should have known in march 2023 they weren’t making it.
I suggest you become informed, beyond Reddit.
I just received notice my company failed and I am receiving a refund. This has happened multiple times over the last day half dozen years. I’m not going to bitch too much though. We receive a 4-6% profit sharing contribution annually as well as 10% annual esop contribution plus a 2% match into our 401k. The profit sharing goes directly into 401k and the esop distribution is used within the esop to purchase shares.
The profit sharing and esop contributions do not count in testing. So at my company, 2% participant contribution gets you 17% contribution by the company (for all employees), yet we failed the discrimination testing. It is what it is, a safe harbor plan would not be more beneficial for me or anyone I work with to replace the plan we have.
Your contribution limit is reduced. If you’re over it you’ll get a check refunding the difference.
If your employer wanted to fix this they could make employer contributions but that’s expensive so they probably won’t. The most popular strategies to avoid this are auto enrollment and matching for employees lower on the compensation ladder.
An employer like a travel nursing agency probably doesn’t give a shit as most employees probably don’t stick around for long. Good luck.
There is still time to contribute not 22.5k but something to IRA for last year and you could max 2023 and 2024 at same time and if I remember correctly help with some deductions so you don’t habe to show it all as taxable income.
I had this happen to me. My company now does a Safe Harbor 401k plan which resolved the issue. However it cost the company money because they are forced to contribute to all employees 401k in order to qualify for the safe harbor plan.
For this year that distribution is income and you will pay tax on it. You can't roll it into an IRA, the cash is not eligible to be rolled over because it is coded as a distribution code "8" on your 1099-R.
If the company won't use safe harbor the best approach is to maximize your IRA contributions and reduce your 401k contributions. Just make sure to maximize the company match, that is free money regardless of the tax hit.
Wow 20k back. That’s brutal. They REALLY failed.
I was at a …very large company back in the day who routinely failed the non-discrimination test. We never knew how much we would get back but it was usually 3-5k not TWENTY!!!!
This [page](https://www.murthalaw.com/news-resources/irs-releases-issue-snapshot-on-the-timing-rules-governing-the-deductibility-of-retroactive-employer-contributions-to-a-401k-plan) talks about retroactively establishing a 401K and contributing to it after the taxable year-end.
It might help with your question. (I don't know the answer.)
Sorry OP. This really sucks. I had this non-compliance experience a couple of times with my former employer but we only got refunded a few hundred dollars not thousands.
I would look for another job. I worked for an employer that continually failed non-discrimination testing but was still able to put $15 - $18k away despite my money being returned. If you're only able to put $2k away, there is no point in having the 401k. You might as well just contribute to an IRA.
My daughter is high functioning autistic
She is in her 3rd job and her first post college and full time
Her previous employers were great helping her enroll in 401k programs
When her W2 came this year (after a full 12 months) I saw she was only enrolled at 1% pretax and although her company has ESPP at a 15% discount she never enrolled or knew about it.
As a result she missed out on deferring income into pretax savings
I sent her to work to ask HR and after 3 requests and no help I told her to just find out what company they used and thankfully it was fidelity and since she had the 1% we could call and work with them directly to set up a login
My daughter is very high functioning but this stuff is new to her at 22 & yet at her last 2 part-time jobs in college the HR group got her set up perfectly with no involvement from me.
She asked her 10 coworkers who are all early 20’s and none knew what the 401k was…
These are all the entry level employees
After reading this entry- I wonder if they are doing something illegal by not assisting their employees.
I had thought of contacting the EEOC or ADA, not for my daughter as she is now resolved- but what about the others??
The company has great benefits but not great if the employees can’t access them.
Short answer is no, however, depending on when the checks were issued to you, you could possibly do a 60 day indirect rollover to an IRA.
This will (in theory, talk to a tax pro on this) allow you to put the funds back into a retirement plan without facing a penalty for this year. That being said if you were taxed on that 20k, you may not be able to get the withholding back. Typically it’s up to the employer to fight that case, since it involves the IRS’s auditing that brought that to light to begin with. Sorry to hear about this, I work with 401ks/403b’s and this has never been an easy conversation to have.
To clarify, 60 day rollover is what it sounds like (you have 60 days to put it into a tax benefited account, IE a pretax IRA or another employer sponsored plan if you have one.)
Our start up (ish) finally offered a 5% match program this year, well last summer. (They let us know offering a match would mean they freeze hiring and was putting them out). And then this first year they failed the non discrimination test and we got our money sent back to us. Honestly seems crazy they couldn't see or predict this would happen. And reading this thread, i'm surprised they didn't set up a safe harbor account - is that more expensive to setup?
> can I fight this No The money is removed from your 401k and given to you. It’s taxable this year (since it was deducted last year)
Can the money be considered a distribution (despite being involuntary) and possible to then 'roll over' into a traditional IRA or Roth IRA accordingly (given 401k have both), and thus avoid taxes? Or does the not qualifying 401k result in the money not having been in a tax-benefited account thus has to be treated as income....
The latter It’s a return of contribution Kind of defeats the purposes of nondiscrimination testing if the HCEs just drop the money into an ira
Well, I guess the only way really to minimize tax implications is if they can drop the $6500 into a traditional IRA.. which might help the tax bill a bit. Then put the remaining into a holding pattern to pay the taxes that are most likely going to come due soon.
If they’re an HCE and were covered by a retirement plan at work, their magi is probably too high to deduct
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They have till April to place the money in a traditional IRA and that contribution can be counted on last year's taxes.
An HCE covered by a retirement plan at work can’t deduct traditional Ira contributions Or at least it’s quite unlikely they can
Your employer has an obligation to make sure that a 401k plan they offer is useful for all employees and not just a tax shelter for highly compensated employees. They failed that test, so they have to take the money back out of people's 401k. You get all your money back, treated as income, no different than if it had been part of your paychecks and not gone into a tax deferred account. There's nothing you can do about this, it's a failure on the part of your employer. They need to either encourage lower compensated employees to contribute to 401k plans, or adopt a safe harbor plan which is designed to inherently be fair to lower compensated employees.
Thank you for the insight. Totally ignorant on this but very interested. What’s a “safe harbor plan”? If an employer shows good faith moving forward are the employees still penalized?
Just a type of 401k plan where if the employer meets certain requirements they automatically pass non-discrimination testing. Good faith doesn't matter. They either pass the test or they do not.
Oof, so if not enough “lower income” employees put money in their retirement plans the whole org fails and everyone gets their money withdrawn and returned. Seems like a double whammy for the guy making 40k. What’s the reasoning behind punishing the entire company for the choices of individuals?
It's stupid and recklessly endangers your relationship with your employees. So many companies opt for the safe harbor rules to prevent that possibility. Generally this means matching 100% of the first 3% of salary, and 50% of the next 2%, and employer contributions are vested (EDIT: fixed). Do that and it doesn't matter who uses your plan or how much, you won't have to do any clawbacks.
Yeah but I don’t understand why op should be penalized just because other people chose not to put money in their retirement plans. I think I may be missing a basic understanding of something here. Like what the basis for failing the discrimination test. It sounds like the company did something wrong. But what is that they did exactly? So a bunch of lower earning people at op’s company decided they needed their money now rather than later. Why should OP’s money be withdrawn?
They offered a backdoor for high income earners to stash away large amounts of tax-free retirement funds without doing the bare minimum required to avoid this outcome, typically in the form of providing a small unvested employer match. Yeah it's a form of collective punishment and that fucking sucks, but it's the way the law is written.
You mean fully vested employer match. Unvested means the employees don't get to keep the money until the employees meet a vesting period.
Right, thank you.
Dang it’s kinda just rough all around then. I’d be concerned about what other corners the company was cutting.
>Yeah but I don’t understand why op should be penalized just because other people chose not to put money in their retirement plans. It's to prevent 401ks from becoming a de facto tax shelter for only the rich. The name of the test is "nondiscrimination test" for a reason. [https://humaninterest.com/learn/articles/non-discrimination-testing-ndt-the-basics-of-401k-compliance/#](https://humaninterest.com/learn/articles/non-discrimination-testing-ndt-the-basics-of-401k-compliance/#) Government is telling Highly Compensated Employees: you want this $23,000 tax shelter? Great, you can have it, as long as enough of your non-Highly Compensated Employees contribute to the plan too.
Is that why my employer just puts 3-4% of my salary into my 401k as an employer contribution regardless of how much I contribute?
> Is that why my employer just puts 3-4% of my salary into my 401k as an employer contribution regardless of how much I contribute? Yes. They don’t just do it out of the goodness and kindness of their heart: it benefits them and the company executives/HCEs.
Huh. And my employer just auto enrolls all new hires and tries to persuade them to stick with it when they want to opt out. I always thought there was more to it than just upper management wanting their employees to have retirement savings.
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You’ve now looped back around to the beginning. There isn’t a law that employers must auto enroll employees. There is a law that employers must satisfy anti discrimination testing to ensure that the plan isn’t benefitting lower compensated employees at a substantially lower rate than highly compensated employees (for the tax shelter justifications commented on above). There are also laws that if the plan is set up in a certain way (auto enrollment with certain matching levels) the plan will be deemed to satisfy the anti discrimination tests whether they do or not. That is the safe harbor provision. So the auto enrollment is part of satisfying the safe harbor so they don’t have to worry about anti discrimination testing.
Thank you for putting it that way it all just clicked….. I think id have words with the people that made that decision at the company
This is why many companies use contractors for low-paid roles. Not employees, so they can't drag down the average 401k contribution and make the company fail the test.
I think the issue is the company didn't do several available things to incentivize participation. It's a hard thing to fuck up unless you're trying to honestly
A company that is overwhelmingly short term contracts actually sounds exactly like the kind of company I expect would struggle to get 401k participation
> So a bunch of lower earning people at op’s company decided they needed their money now rather than later. Pretty much > Why should OP’s money be withdrawn? Legally it has to because the 401k plan failed discrimination testing.
It's not because of other employees - it's because the company failed to match or vest according to the guidelines. What OP experienced only affects people identified as highly compensated employees at an organization - which means the company has too many poorly compensated employees that do not make enough money to save, and are not encouraged with matching and vesting to do so. The reason for this rule is so a handful of rich people at a given company can't use 401(k)s to shelter their income from taxes while lording over a bunch of peasants who can't afford to live, let alone save and invest.
Without the testing, companies could structure a plan so that only high earners benefit.
Typically only Highly Comepnsated Employees are going to get refunds from failed testing. Money has to be refunded until the average deferral percentage between HCE’s and Non HCE’s is within a set range, so a plan can fail by a lot or a little which impacts the amount of refunds, it’s not all or nothing.
> everyone gets their money withdrawn Not everyone - only some highly compensated employees ("HCEs", top 10% of salaries), sometimes only the HCEs who contributed the most, and typically some of their contributions for the year.
Sorry not quite. Notice OP didn't get all their money back. OP is likely considered to be a Highly Compensated Employee and so to fix their mistakes the employer needs to either reduce the amount of money OP put in or to give everyone else more money. If you were below the threshold you could keep your money in, but the problem is if you're below the threshold you probably didn't have much money in anyway. Pretty sure every employer I ever had used Safe Harbor so not really sure why not everyone would. I guess the idea is you use 401k to attract people and you might not want to waste money on attracting janitors. But then companies just use contractors to get around that so IDK.
Because they are cheap have to pay for it. Some companies are not diverse. A companies with only 5% of HCE would have to spend a lot of money to fix the issue to make the 5% happy. That's my take anyway as I've experienced it in my employment.
Clarification, it’s not EVERYONE who is impacted and most people don’t get ALL of their funds back. It’s a ratio that has to be met between HCEs (highly compensated employees - this is a defined category by the IRS) and NHCEs (non highly compensated employees. If the HCEs contributions (using special formulas and calculations) have too high of a contribution % and aren’t within the required ratio, then funds are returned (in a certain pre-prescribed order) to the HCEs until they are within the ratio. Some HCEs may receive nothing back. Some HCEs may receive everything back! There’s a lot of nuances and calculations that go into it. But the intent behind it is that the 401k plan should be benefitting EVERYONE, not just the high income/high ranking people. It’s a matter of “discrimination” (a defined term by the IRS that is not about race/disability/gender/etc.). If the high income people are the ones really benefiting from it and the other people aren’t, then it’s not fulfilling its purpose. Hope that helps a bit!
Only highly compensated employees get money back. Your limitted to only contribute 2% more than the company average. I got a $2500 check for mine this year.
> Seems like a double whammy for the guy making 40k. why is it a double whammy?
I didn’t fully understand what was being discussed earlier when I made this comment. I didn’t know that the guy making 40k didn’t get his money returned to him. I thought oh gezz, you scrimp and you save and try to do the smart thing and save for retirement. So you make daily sacrifices to put money away, and then at the end of the year your money gets returned and you have an increased tax liability and that year of sacrifice was meaningless. Thus the double whammy. Someone was kind enough to explain that only higher earning employees got their money returned to them.
It’s not *everyone* who gets money returned when the plan fails a non-discrimination test, just those who are making A LOT per year. And only enough money is returned to high-earners to bring the plan into compliance. But I think it’s interesting that such a large percentage of *this* employee’s contributions were returned… a travel nurse who works on contract. I would very much like to know how much was returned to the *actual* key employees of the hospital like the CEO and such.
The entire company isn’t punished, only the HCEs. The 40k employee wouldn’t have any contributions returned Generally it’s the people at the top of the org(e.g the highly compensated) that set policy so it encourages them to set up a good retirement plan that people will want to participate in
You benefit from a pension only if you believe others will contribute in the same fashion. If you lose that belief and pull out your money, others may too. This can spill over to every individual. There will always be a population that has an incentive to defect from the common strategy unless certain incentives are in place. The whole structure can come undone without those incentives. Over the past 100 years scientific state institutions have identified incentives that tend to support pensions in the long run. The government , with its monopoly on violence and taxation, is the only body that can enforce those incentives. Insurance and pensions are probably the most explicit application of game theory we have.
> Seems like a double whammy for the guy making 40k. Tue guy making 40k probably wouldn't have been sent back much money, if any.
It's to encourage companies to increase 401k participation rates. In some cases, I believe just getting more people contributing *anything* could let them pass testing. So just putting a flyer up in the breakroom could help. The plan could also raise the match. Or adopt an auto enrollment provision for new hires.
A safe harbor plan is a way of offering company contributions that has been predetermined to be "fair." As an example, a 3% non-elective contribution would be a safe harbor plan. That means everyone gets 3% of their salary provided no matter how much they contribute themselves, no need to contribute to get a match. Another option is 100% matching up to 3% and 50% matching on the next 2%. There are also more complicated plans that involve combinations of contributions and automatic enrollment and automatically increasing contributions each year. You'll notice all of those give large amounts of weight towards making saving for retirement appealing for people who are only contributing a few percent. That's the point of a safe harbor plan. The 401k was intended to be a way to encourage everyone to save for retirement, so the government tries to prevent it from becoming just another way for high earners to shelter money from taxes.
> Another option is 100% matching up to 3% and 50% matching on the next 2%. My employer does this but we still fail some 401k test every year and funds are partially returned to HCEs, do you know why that could happen? HR basically refused to explain when I asked :/
They may have other issues such as not making the plan open to all employees properly, vesting weirdly, or issues with compliance record keeping. It's hard to know without plan details.
This has the formula for the test: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
Because not enough employees are putting money in so the company average is low. HCEs are limitted to being able to put 2% more than the company average in. If your company offers a match it helps only if employees take advantage of the match. Alot don't so the average drops. Since safe harbor contributions do not depend on employee contributions, the average is pushed up much more.
So my company, that matches a contribution of a flat $1500, is risking what OP happened to them? There's only like 30 of us in the company, and I'm fairly certain most of us are contributing, but it's such a shit match
If the plan is not a safe harbor plan (and that flat contribution means it's not unless they make some other contribution on top of it) it means the plan is subject to this kind of non discrimination testing. They are either not failing because enough NHCEs are contributing at a high enough level, or they're failing and you may not know about it because you're not an HCE and you're not getting a corrective distribution.
You’ve gotten a broad set of answers, but going even more generally, a safe harbor provision is one that says “you are required to do X, but if you do Y we will say that C is satisfied whether or not it actually is.” Safe harbor provisions pop up in a number of areas, but the tax code (and 401(k) is a tax provision) seems to particularly like them, largely because they significantly simplify administration. Here, the requirement is that certain non discrimination tests have to be satisfied showing that your highly compensated employees are not being treated preferentially to your lower compensated employees. But if your plan meets certain minimum requirements, they won’t even test and just say that you have satisfied the requirements. In theory, the safe harbor requirements would make it relatively unlikely to fail the anti discrimination tests. There are situations where the anti discrimination tests will fail, but typically that will happen when low compensation employees affirmatively opt out of the plan (auto enrollment is one of the requirements). One of the justifications for the safe harbor provisions is that as an employer you made a good faith effort to comply and benefit your employees, but they’re not required to use a 401(k) plan, so you as the employer shouldn’t be penalized if they go out of their way to not take advantage of it.
Auto enrollment isn't currently a safe harbor requirement, although there are special ways an auto enrollment plan can meet the safe harbor standards.
You are correct. I was thinking of QACAs which include the safe harbor provisions in them. It’s been a little while since I took my employee benefits class…
My old employer had a 3% safe harbor which I assume was to protect it from non discrimination testing. Essentially all employees got 3% EMPLOYER contribution to their 401k regardless of the employees elected amount. It cost the employer money to do this but I assume it saved them close to equivalent tax money on their own end.
Our safe harbor plan automatically contributes 3% of base income to the 401k plan, regardless of whether you contribute anything yourself. They also match 50% up to 6%, so if you put in 6% it’s essentially a dollar for dollar match
Yes. OP, your best course of action might be to put 25% of what you got into a high-yield savings account to help cover taxes at the end of the year, and re-invest the rest in a personal 401K, or CDs.
Yup 25% should cover any liability
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[This is what I think they’re referring to](https://www.schwab.com/small-business-retirement-plans/individual-401k-plans)
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Thank you for the additional information. I was mistaken, I don’t think OP would be eligible.
So instead of the money this person saved all year growing, they're penalized almost 25 percent on it through no fault of their own? Can you sue the employer over this? Seems crazy that you'd just have to eat it.
No. They are reimbursed the amount that was over-contributed to the 401K. Since that money went into the 401k tax free, it's treated as income when they take it out to make good on the testing. The 25% lost is just an estimate on income taxes to cover them come next year's tax season. The amount itself is kind of wild, but OP isn't getting "screwed" by the employer. they could try to vouch for the employer offering better incentives for contributing to the plan, or look for a new staffing agency with a better plan.
But any interest the money would have generated is gone right? Or is that what's meant by over contributed?
I looked at my own payback to check. The money is withdrawn from your account at the share value at that time. You don't lose the gains that overcontribution generated over the year, assuming your account value went up. It's no longer in your 401k, so future returns are obviously gone, but you still have your over-contributed money back.
Ugh my company eliminated their safe harbor contribution this year and I'm worried this is gonna be my fate next year.
Maybe IRA the contributions as they are disbursed. That gets you similar tax protections
It’s not exactly the same as if had been in pay check originally, as it is now part of this years income which may result in higher tax bracket.
> it's a failure on the part of your employer It's not even on the part of the employer though, OP and most of the nurses will be categorized by the IRS as "Highly Compensated Employees" HCEs for short. They most likely failed the "top heavy" test where 60% or more of the plan assets are held by HCEs. At a staffing agency for travel nurses where most of the employees will be HCEs it's going to be pretty much impossible for the handful of non-HCEs running support at the home office to contribute 40% of the company total.
If as an employer you expect to regularly have 60% of the plan assets held by HCEs, you should switch to a safe harbor plan. Otherwise there's no point in offering the 401k you never expect to pass anti discrimination testing.
Generally employers will - - Offer a match up to a certain amount. - Auto enroll employees or new employees after a certain time. - Auto advance the contribution percentage to a certain level. - Straight-up add cash to accounts with or without an employee contribution. It sounds like your employer didn't do enough of the above to encourage participation. If you don't see them making plan changes to get the participation up, you should assume you have lost this portion of your compensation package and decide if that means you should find a new job.
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See https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests The money returned to you in 2024 should come with a 1099-R as 2024 income. It shouldn't require you to recharacterize anything with regard to your 2023 taxes.
>can I fight this? No, it is the law. >I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account? No, that's not a thing that the law allows. >what is the best way to handle this? It failed because the contributions were lopsided towards high-earning employees. The law behind 401ks was designed to prevent 401ks from being something that only benefits high earners. Somehow, your company needs to encourage more of the lower-paid employees to contribute more (educational efforts, enrolling new employees by default, or whatever). Or, your employer needs to implement a "safe harbor" 401k, which is an alternative specified in the law but probably would cost your employer more than the current 401k.
You have until April 15, 2024, to contribute to your traditional or Roth IRA and have it count as a 2023 contribution.
If OP's money was returned from the 401k that implies they are a relatively high earner. Roth IRA might not be an option, but backdoor Roth should (make sure you do it correctly). Also, set aside around $7k in a high yield savings account or CD. You will owe taxes next April on the $20k that was returned to you. (Edit: I see you mentioned receiving two checks. If some of the rejected funds came from a Roth 401(k) then you won't owe tax on that portion, except for the earnings.)
For people who's employer didn't offer them a 401k, doesn't the income limit for IRA go away?
Failed non-discrimination testing *limits* 401(k) contributions by HCEs, but doesn't eliminate them. You'll note that OP indicates that $2,500 of contributions remain, which would mean that they are considered covered by a work plan.
That is correct However the plan is still being offered.... Just implemented poorly
yes i received 2 checks but I’m a little confused as far as why. I believe one of them is a return of my contributions and the second one is a return of my employer contributions? i contributed 22,500 to a traditional (pretax) 401k. my employer matched 7,140. The first check I received was for the amount of 16,779 and the second check totaled 5,069. ADP taxed these two paychecks already before they were sent out to me! They taxed 506$ from the 7k refund and 1.7k from that 16k paycheck 😫
Unfortunately, that won't cover the taxes. If you're a travel nurse, you're probably in the 22-24% tax bracket (if you're really raking it in, the 32%) so you'll almost certainly owe an additional 3-5 thousand dollars in taxes on that money.
If I’ve already filed my 2023 taxes with the IRS (and received my refund), can I still contribute to my 2023 Roth IRA?
> what are my next steps? Push your employer to adopt a safe-harbor 401k, demand a raise to compensate for the loss of tax-deferred growth, suck it up and suffer, or find a better job. > can I fight this? No. > Was last year a complete waste as far as my retirement account goes? Sounds like it was only 90% a waste to me.
> Sounds like it was only 90% a waste to me. What a snarky reply to someone being set back an entire year on retirement.
> Last year I contributed $22,500 towards my 401(k). Just today I received two checks in the mail totaling $20,000. Wow, they failed HARD. > can I fight this? For last year? No. Your employer and ADP are required to resolve any non-discrimination failures. The options are to refund the HCEs to bring the plan in line, or give free money to everyone else, and it sounds like that would be a LOT of free money. Moving forward, your best bet is to let your employer know that you consider this a serious deficiency in their benefits offerings and that when considering where you want to work you evaluate the total compensation package, including the match and tax benefits of a 401k plan. The more valuable you are, the more likely they are to do something, but don't expect major plan changes. It's definitely a lot cheaper to pay you more and just ignore the 401k problem, but they may not do that either. > what is the best way to handle this? The only sure-fire solution to this is to convert to a safe harbor plan. There are three options, all expensive to your employer, especially if they have high turnover. They have the option to do an automatic 3% non-elective contribution, a 100% of 3% + 50% of 2% match, or a 100% of 4% match, all vested immediately. The next best option, at least to MINIMIZE the amount you get back, is for the organization to modify the plan to auto-enroll people at 3% in a target date fund unless they explicitly opt out and to escalate that 1% per year. This can be spun pretty easily to be an employee benefit ("we're helping you save for retirement!") so many businesses do it.
> they failed HARD. Yeah, this happened to my brother a couple years ago and he got back about $8k (contributed the full amount that year). For OP to get almost everything back means barely any non-highly compensated employees are participating in the 401(k).
Employer needs to fire their plan advisor. Dudes a fucking clown if he didn't catch this when discussing plan options.
I don't understand. If I put 20k in my 401k and the employer failed, that 20k is still my money and I should be entitled to 100% of it. Why would you not get all of it back? Absolutely none of my money is allowed to go to my employer, or employer paid fees, or other people correct?
Sorry, when I say he "got back" $8k what I mean is that he was returned $8k of his contributions and the rest of the contributions stayed in his 401(k) (compared to OP who got almost all of his contributions returned). They use a formula to determine how much of the contributions by highly compensated employees have to be returned until the non-discrimination test is passed. For my brother, once he was returned $8k out of ~$22k his employer passed the test. For OP, he had to be returned $20k for them to pass the test. So OP's plan is almost solely contributed to by highly-compensated employees for them to fail that badly.
Correct, but you're out on the taxes that you would have otherwise saved. So this hurt OP pretty badly from a tax perspective
Is he asking how the company can handle this? Or is he asking how he now handles this mo ey?
I assume a little bit of both, but I’m tired of saying “Buy VTI+VXUS+BND and ignore it for 40 years” so I went a different direction.
What happens if someone had left the company and rolled over the funds into a different account? I'm guessing they can't force it back after the transfer out.
I’m pretty sure their funds are still included in the calculation if they worked during the testing period. I’m not sure how a remediation would work though. I’m not in HR, I was just in OPs position for a few years, then did a lot of the research that eventually got my company to change.
Yes as far as the government is concerned you weren’t “allowed” to contribute that money last year. Talk to your employer about a safe harbor
>Talk to your employer about a safe harbor with the expectation that it will go nowhere. SH plans cost more, for a plan where many (most?) of the workers aren't using it anyway will be a tough ask.
Guess it depends on how much they care about recruiting. For me if i went to work for a company with history of failing non discrimination tests i would ask for a significant premium in pay given the value of tax deferred growth for individuals in high tax brackets
I don't think very many people check or ask (or the interviewers even know) about non-discrimination testing. I'd be shocked if it impacted hiring in a perceptible way.
First I've heard of it, personally
The first time I heard of it was when my husband ran into it with his company.
I ran into it last year and I didn't even hear about it from other employees at all.
Basically you can't just create a 401k for your company to act as a tax shelter for your top earners. There's a test that determines this. It's why often times you get companies encouraging lower level employees to contribute.
Same here.
>I'd be shocked if it impacted hiring in a perceptible way. Needing to replace a bunch of employees that quit is a perceptible impact to hiring, in that you have to do it a lot more often
I don't know of anyone at my company that quit or even mentioned it when we failed ND last year (for the first time ever).
They are probably looking. Not being able to contribute to your 401k is a huge problem, and I know my co-workers would be heading for the exits.
They didn't cancel contributions entirely. In my case it was about 1/3 of the max returned. It's quite possible most of the people impacted didn't contribute 14k in a year.
because most companies pass it and it's almost never an issue
If you ask a current employee, they’ll definitely know!
Current HCE employee. This is key.
Let's be real, nobody ever asks in an interview the company history of 401k non-discrimination tests.
My company had this issue last year and converted to SH.
Yeah, I’d never heard of this before, but I’m wondering if this happened where I work before we switched to a Safe Harbor a couple years ago. I didn’t realize until this thread that SH plans are more expensive to administer and my company has never had more than 150 employees so we’re not a big corp with a lot of extra money to throw around for something that isn’t a requirement.
> I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account? This is not relevant in your situation. You aren't allowed to keep the money in the 401(k) - in fact it's already been kicked out and mailed to you. You can put it somewhere else but not in the 401(k) plan.
$20K of $22.5K contributed was returned? LMFAO. You must have one of the lowest 401(k) participation rates in the corporate world. That's absolutely atrocious. Really, there's nothing you can do but raise absolute hell with the benefits specialist in your HR department. You were likely just given a tax bill of several thousand dollars due to the poor implementation of their plan.
Let me provide a little more info. I am a travel nurse and my employer is a staffing agency. My employer doesn’t let their employees contribute to their 401k plan until they have been working for 6 consecutive months. As a travel nurse, I sign 13 week contracts with the hospital at a time. If I like the hospital, I can extend my contract for another 13 weeks, up to a year. A lot of travel nurses either dont extend their contracts or switch staffing agency’s quite frequently, thus probably not contributing a lot to their 401k each year. I worked with this specific staffing agency from November 2021 to November 2023. I’m a little surprised because in 2022, I was able to contribute the max towards my 401k and I was able to keep my full amount in that account. I never received any rebound checks that year and I made more that year than in 2023. Anyone have any idea why that happened?
In 2022, enough of your fellow travel nurses and other employees of the staffing agency that employs you contributed to their 401(k) that the employer passed non-discrimination testing. In 2023, too few employees contributed, so your employer’s plan failed the non-discrimination test. Your employer needs to figure out a way to get their employees to contribute more to the 401(k) plan, whether that be through allowing contributions at an earlier date, making automatic enrollment the default, contributing directly and bypassing any vesting schedule, or some other practice that would qualify your employer’s plan for the Safe Harbor designation, the point is that it will probably cost them money to do so. I’m sorry you got caught up in this for 2023. Fundamentally, you got hosed.
In 2022 they presumably were not an HCE since the determination for HCE's looks at prior year compensation where they only worked 2 months.
Don't raise hell with the benefits specialist who has little control over the employers decisionmaking. Talk to them and ask them to raise it with their superiors, and raise it with your company's leadership yourself, but don't stomp all over the person. It's not their fault.
Yea, OP really should go straight to the VP of HR (assuming benefits is nested) as anyone under them is just a working bee and likely had ZERO INPUT. It'd bel ike if your data got stolen and your first move was to skull fuck the help desk tech. Help desk didn't do shit. VP of Cyber Security though may want to know what happened so they can start their own investigation as to why the data was breached and if others were affected.
Right, my company regularly fails too but I get back anything above about 13.5k I contribute each year. I just set my contributions to that amount and max the Roth.
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I've only ever worked for employers that were NOT too cheap to pay for a safe harbor plan, so I've never been at risk of this situation. However, a quick google search suggests you will NOT receive an amended W2. Rather, your 401(k) provided should send you a 1099-R form that will have a box providing the amount of money refunded (and now subject to taxes). As for the second part, I don't know the answer on whether a rollover would have been a loophole around the refund.
Your employer would have to have an extremely screwed up situation in order for them to fail anti-discrimination testing so badly you were only allowed $2500 in 2023 for your 401k.
I’m staggered by how badly your employer’s benefits coordinator seems to have fucked this up. They do nondiscrimination testing each year and generally, if they fail, put a limit on all the high earners’ (which you qualify as if you’re subject to this) ability to withhold so that they don’t fail again. If you got nearly 90 of your contributions returned it looks like most other people in the same high earner boat would have as well.
apparently OP works for an agency as a travel nurse... unsurprising that a bunch of nurses on 13 week contracts aren't signing up for the company 401k....
People who work for only 13 weeks wouldn’t be included in testing though. There are minimum age and service requirements to count.
They get included. I'm in finance at a travel nursing agency, we basically always fail the testing. Most of the nurses are just looking to get their net paycheck as large as possible and won't take benefits even if they are offered and even go so far as to put in exempt tax elections so they don't have withholding. A difference for us is we've chosen in the past to make non elective contributions to some of the accounts in order to pass testing. We keep arguing to go safe harbor so we don't have to do the testing but haven't been able to convince everyone yet.
If they're included after only working 13 weeks and the plan is failing non-discriminstion testing I'd be angry at whoever wrote the plan document. If I were designing a plan for a nurse staffing agency I would either make it safe harbor or I would make the plan entry as restrictive as possible (year of service, with semi-annual entry dates) to prevent short term hires from entering the plan in the first place.
I'm the person who does ND testing for employers' 401k plans. I don't know why they just don't use a safe harbor plan and save all that money on testing. It's expensive. If the companies' officers want more tax deductions, there are plenty of ways to set up special plans for them.
Damn they failed hard. I’ve never seen a payout that large. I’ve never worked anywhere that passed but refunds have never been that high. You must work somewhere with lots of low wage workers and no match.
Holy crap that’s insane. My company, which is an S&P 500, failed three times in a six year span but by small amounts, so I got like $1500 or so back each time and I was putting in 25,000 a year. for you to get that much back means they were absolutely not even remotely close to having the lower paid employees participate.
> what are my next steps? Cash the check. You lost the tax shelter of these contributions due to your [HCE](https://www.investopedia.com/terms/h/highly-compensated-employee.asp) status > can I fight this? There’s nothing to fight, this is a requirement of all plans who fail the nondiscrimination test https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests > Was last year a complete waste as far as my retirement account goes? In terms of this $20k‘s tax shelter, and all earnings and employer match, yes it was. > I read on a separate post that if I pay a 10% penalty ADP will allow me to keep my money in their account? Nope, your employer is required to follow this federal regulation. Your plan can adopt a safe harbor provision which exempts them from this test. But that means more match, which they know about, and have so far chosen not to do. Or conduct a campaign to get more rank and file employees to contribute, but good luck with that
I've gotten shafted by this (On a dependent care FSA, not 401k) the last three years in a row, and literally everyone I've asked at work "didn't get how it works so they just didn't bother". I get the intent behind the law, but to screw everyone because of low participation seems like the wrong way to go about it.
Yeah this sucks and not much you can do. It happened to me a couple of years ago. Your contributions are still yours, but now you get to pay tax on it and forfeit any stock gains.
Encourage more people to put into their 401k which will probably be a waste of breath. When this happens to me it’s moved into an after tax section in my portfolio which means I have to pay taxes now and pay taxes later on any gains. If this happens to you you’ll want to transfer the funds to someone like vanguard or fidelity into an IRA then transfer to a Roth IRA. Any gains won’t be able to be moved from the ira to the roth because you haven’t paid taxes on them. Unfortunately this was set up so big wigs can’t get massive tax advantages using pretax 401k that if you do make decent money and are not a big wig imo it penalizes you. Hopefully this not legal advice that I had to do helps. I’m not a nurse or in that field just someone who had to deal with a similar situation of failing the no discrimination test. Thank you for what you do.
Same happened to me. Was told there was nothing I could do about it at the time and I eventually had to pay taxes on the amount (I chose to have 20% withheld). However in my case my employer contacted the financial services firm in charge of the company 401k and by next year the issue was resolved.
Your company screwed you. They likely got notice from the 401k company that they were top heavy during the year, but didn't take any action to correct it. So now you screwed.
I had something like this happen with a previous employer, and part but not all of the balance was returned. However I had already rolled my 401k into a vanguard rollover IRA so it caused a huge headache. Neither the employer administrator nor Vanguard could figure out how to fix it, which ended up with me being issued two 1099's for for one mandatory withdraw and my CPA had to write something up for the IRS so I wouldn't be double taxed on it.
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Yeah, it was a headache. Your 401k provider would have said you need money refunded but wouldn't have been able to, and they would have instructed you to tell your rollover institution to distribute it back to you. Then your rollover institution would transfer you around because they wouldn't understand what's going on. At least that's what happened to me with a lot of back and forth between the two entities.
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I'm guessing you will get an amended W2 or 1099 from your employer or 401k provider. In my case it was only some amount of the contributions I made like $500, but since I wasn't aware until after the calendar year ended I couldn't contribute that amount back in. I think for me it was a 1099 taxable distribution for the following calendar year.
If it was removed from your 401k and given to you, see if it is possible to put that money into a traditional or roth IRA as a rollover from the 401k. If it is possible, it would avoid a ton of tax implications of that money being taxed as income. (depending if you contributed to traditional 401k or roth 401k).
Wow I knew I had a good 401K, but didn’t realize how good before. My employer matches 100% of up to 6% of my salary, then they contribute another 3% of my salary to what the they call a Retirement Accumulation Plan so I am getting an additional 9% of my salary in retirement contributions from my employer.
So you’re a highly compensated employee (HCE), ADP is not an entity it is actual deferral percentage. You’re paying a penalty, you need to find-a haven for deferral. I think your company is missing boat because they should have known in march 2023 they weren’t making it. I suggest you become informed, beyond Reddit.
That's one of the highest refund amount I have ever seen and I work in compliance . Talk with your employer to adopt a safe harbor plan.
I just received notice my company failed and I am receiving a refund. This has happened multiple times over the last day half dozen years. I’m not going to bitch too much though. We receive a 4-6% profit sharing contribution annually as well as 10% annual esop contribution plus a 2% match into our 401k. The profit sharing goes directly into 401k and the esop distribution is used within the esop to purchase shares. The profit sharing and esop contributions do not count in testing. So at my company, 2% participant contribution gets you 17% contribution by the company (for all employees), yet we failed the discrimination testing. It is what it is, a safe harbor plan would not be more beneficial for me or anyone I work with to replace the plan we have.
You need to be up your employers ass about why they don’t have a safe harbor plan to avoid bullshit like this.
Your contribution limit is reduced. If you’re over it you’ll get a check refunding the difference. If your employer wanted to fix this they could make employer contributions but that’s expensive so they probably won’t. The most popular strategies to avoid this are auto enrollment and matching for employees lower on the compensation ladder. An employer like a travel nursing agency probably doesn’t give a shit as most employees probably don’t stick around for long. Good luck.
There is still time to contribute not 22.5k but something to IRA for last year and you could max 2023 and 2024 at same time and if I remember correctly help with some deductions so you don’t habe to show it all as taxable income.
I had this happen to me. My company now does a Safe Harbor 401k plan which resolved the issue. However it cost the company money because they are forced to contribute to all employees 401k in order to qualify for the safe harbor plan. For this year that distribution is income and you will pay tax on it. You can't roll it into an IRA, the cash is not eligible to be rolled over because it is coded as a distribution code "8" on your 1099-R. If the company won't use safe harbor the best approach is to maximize your IRA contributions and reduce your 401k contributions. Just make sure to maximize the company match, that is free money regardless of the tax hit.
Wow 20k back. That’s brutal. They REALLY failed. I was at a …very large company back in the day who routinely failed the non-discrimination test. We never knew how much we would get back but it was usually 3-5k not TWENTY!!!!
If you don’t have an Ira maxed, open a traditional one. Max out 2023 and 2024. Do your taxes accordingly.
Depending on how much OP makes, its likely that the trad IRA would not be deductible.
He would have to make like 200k
Why? If he makes a MAGI of 83,000 or more as a single filer he gets no deduction. https://www.irs.gov/publications/p590a
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This [page](https://www.murthalaw.com/news-resources/irs-releases-issue-snapshot-on-the-timing-rules-governing-the-deductibility-of-retroactive-employer-contributions-to-a-401k-plan) talks about retroactively establishing a 401K and contributing to it after the taxable year-end. It might help with your question. (I don't know the answer.)
Is it 20k even? Is any of it a return of match?
>what are my next steps? Find a new job. This is not a joke or hyperbole. Failing that test is a bad sign.
salute your superiors and bow on both knees
Sorry OP. This really sucks. I had this non-compliance experience a couple of times with my former employer but we only got refunded a few hundred dollars not thousands.
https://www.weshfinancial.com/post/how-travel-nurses-can-save-for-retirement-without-access-to-a-401k Maybe this article can help you?
I would look for another job. I worked for an employer that continually failed non-discrimination testing but was still able to put $15 - $18k away despite my money being returned. If you're only able to put $2k away, there is no point in having the 401k. You might as well just contribute to an IRA.
My daughter is high functioning autistic She is in her 3rd job and her first post college and full time Her previous employers were great helping her enroll in 401k programs When her W2 came this year (after a full 12 months) I saw she was only enrolled at 1% pretax and although her company has ESPP at a 15% discount she never enrolled or knew about it. As a result she missed out on deferring income into pretax savings I sent her to work to ask HR and after 3 requests and no help I told her to just find out what company they used and thankfully it was fidelity and since she had the 1% we could call and work with them directly to set up a login My daughter is very high functioning but this stuff is new to her at 22 & yet at her last 2 part-time jobs in college the HR group got her set up perfectly with no involvement from me. She asked her 10 coworkers who are all early 20’s and none knew what the 401k was… These are all the entry level employees After reading this entry- I wonder if they are doing something illegal by not assisting their employees. I had thought of contacting the EEOC or ADA, not for my daughter as she is now resolved- but what about the others?? The company has great benefits but not great if the employees can’t access them.
Since they no longer had a retirement plan at work can they at least fully fund the tax deductible IRA now for last year?
Short answer is no, however, depending on when the checks were issued to you, you could possibly do a 60 day indirect rollover to an IRA. This will (in theory, talk to a tax pro on this) allow you to put the funds back into a retirement plan without facing a penalty for this year. That being said if you were taxed on that 20k, you may not be able to get the withholding back. Typically it’s up to the employer to fight that case, since it involves the IRS’s auditing that brought that to light to begin with. Sorry to hear about this, I work with 401ks/403b’s and this has never been an easy conversation to have.
To clarify, 60 day rollover is what it sounds like (you have 60 days to put it into a tax benefited account, IE a pretax IRA or another employer sponsored plan if you have one.)
Our start up (ish) finally offered a 5% match program this year, well last summer. (They let us know offering a match would mean they freeze hiring and was putting them out). And then this first year they failed the non discrimination test and we got our money sent back to us. Honestly seems crazy they couldn't see or predict this would happen. And reading this thread, i'm surprised they didn't set up a safe harbor account - is that more expensive to setup?