3

As in this question, and this question, my ex-company's 401(k) failed the nondiscrimination test.

I've recently received a letter from the company's HR to the effect that I will receive a corrective distribution (of unspecified amount) that will be taxable as 2019 income. I will receive a tax reporting form (presumably 1099R) in Jan 2020. The letter does not indicate that any tax will be withheld from the distribution.

My question is slightly different. I have already left the company, and I want to avoid a taxable distribution, which would be a setback to my retirement savings. I have two ideas:

  1. Is it legal for me to try to quickly execute a direct rollover to my IRA in order to empty my 401(k) before this distribution takes place?

  2. If I do get a corrective distribution, am I allowed an indirect rollover of this amount into a single IRA, provided I do so within 60 days? (Or, is this nondiscrimination distribution subject to additional restrictions?)

Are these ideas viable? What other options do I have?

5

Executing a rollover won't let you keep an excess contribution in tax-advantaged status. Corrective distributions are not really distributions at all; they undo contributions. In particular, they aren't eligible to be rolled over.

Your proposal #1 may be legal insofar as you won't go to jail, but that won't save you from the penalties on excess contributions.

Moving the money to an IRA is just going to put you through paperwork hell. You'll have to track gains on the excess contribution across all the accounts they've transited through, and pay the penalty each year until you remove the excess.

Let the company fix it.

  • This seems to be true based on what I could find out from IRS.gov. Unfortunately the company's way of fixing it is Method 2 -- the cheapskate option. – C8H10N4O2 Feb 13 at 13:47
  • Does failing the nondiscrimination test make OP's personal account excessively contributed to? Or is it the employer who has to deal with their plan failing the nondiscrimination test? – stannius Feb 13 at 21:40
  • @stannius: The employer is dealing with it by filing paperwork retroactively setting reduced contribution limits on highly compensated employees. OP's personal account is excessively contributed to because the contributions are over the (retroactive) limit. – Ben Voigt Feb 14 at 14:47

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