How to intentionally overcontribute to 401(k) to maximize new employer's matching?

Question

I knew that I was going to leave my former company for one of the Bay Area startups. Expecting that I would not have a 401(k) account there, I frontloaded my contributions and maxed out my 401(k) account with my former employer. I'm currently at $18,500 for 2018, plus all matched contributions that I received from my former company.

An unexpected turn of events led me to accept an offer from a large tech company that has a 401(k) plan and generously matches employee contributions.

I can't contribute any more this year without going beyond the legal maximum but I'm wondering if I should nonetheless do it to take advantage of my new employer's matching. I see two ways to pull this off and I'm debating which one makes more sense.

1. My initial thought was to begin contributing just enough at my new job to maximize my new employer's matching and then in January 2019, notify the new 401(k) administrator that I've over contributed (these contributions would be returned to me). My concern is that if my "new" contributions for 2018 are returned then does that mean there was technically no ground for employer matching and so those matched contributions should also be returned to the new employer?

2. The second approach is for me to contribute just enough to maximize my new employer's matching but then tell my old 401(k) administrator that I've contributed too much. The old administrator would then return the over contributed sum and I'd have to pay more taxes on the gains realized by these over contributions. However, it wouldn't invalidate my old employer's matching and wouldn't have to do anything with my new employer's matching.

I'm leaning towards #1, but that's under the assumption that the return of over contributed money won't require the reversal of all the matched contributions received from the new employer. Thoughts?

Answer 1

One year I switched jobs and accidentally over contributed to my 401(k).

The first job had no matching and the second job did have matching.

To keep more of the matching from the second job, I tried to get the 401(k) plan from the first job to undo some of the contributions to get me back to the limit.

They refused to do so since they came first and told me that I needed to undo the contributions with the 401(k) plan from the second job.

I don't know the rules, but I expect the same thing would happen with you.

Answer 2

From some reading, and it makes sense, employer contributions do not count toward your own excess contributions, unless you go over the larger limit of 55k.

So you are smart to contribute enough to get the match on the new employer's 401k, and correct the issue later.

If your investments are up year to date, then it might be wiser to correct out of the new employer's 401K, but there are some considerations. I doubt strongly they would invalidate the employer's matches, but you might have to dig through the plan details to be sure.

Do you plan to leave your old 401K or to move it to a rollover IRA? Are you planning to do a back door ROTH?

If you are planning on leaving the 401K where it is at, and it is not as favorable as the new 401K, then you might want to correct from the old.

If you are planning on rolling and doing back door ROTHs in the future, the you might want to correct from the old.

You may want to also correct out of the old if you want some increased income for the year.

Answer 3

This has been asked a few times before (see here).

To directly answer your questions however:

1. Yes - if you have deferrals returned, any match based on those deferrals will be forfeited.
2. Depends on if your old plan will agree/has the provision in their document to pay it out as an excess. Same as #1, any match based on returned deferrals will be forfeited.

I can't find anything technically wrong with what you're wanting to do (gaming the system), but it does take a bit of coordination to avoid a bigger tax liability that you were planning for.