It's legal. In fact, they are required to do this, assuming you are in fact a HCE (highly compensated employee) to avoid getting in trouble with the IRS. I'm guessing they don't provide documentation for the same reason they don't explain to you explicitly what the income thresholds are for social security taxes, etc - that's a job for your personal accountant.
Here's the definition of a HCE:
An individual who:
Owned more than 5% of the interest in the business at any time during
the year or the preceding year, regardless of how much compensation
that person earned or received, or For the preceding year, received
compensation from the business of more than $115,000 (if the preceding
year is 2014; $120,000 if the preceding year is 2015, 2016 or 2017),
and, if the employer so chooses, was in the top 20% of employees when
ranked by compensation.
There are rules the restrict distributions from plans like 401ks. For example, treasury reg 1.401a(4)-5(b)(3) says that a plan cannot make a distribution to a HCE if that payment reduces the asset value of the plan to below 110% of the value of the plan's current liabilities. So, after taking account all distributions to be made to HCEs and the asset value of the plan, everyone likely gets proportionally reduced so that they don't run afoul of this rule.
There are workarounds for this. But, these are options that the plan administrators may take, not you. I suppose if you were still employed there and at a high enough level, a company accountant would have discussed these options with you.
Note, there's a chance there's some other limitation on HCEs that I'm missing which applies to your specific situation. Your best bet, to understand, is simply ask. Your money is still there, you just can't get it all this year.
