Can my employer make me forfeit Safe Harbor match if I over contribute?

Question

My employer 401k plan offers 'after tax non Roth' contributions, in addition to traditional pre-tax and Roth. I chose to max out my pre-tax contributions at $19,000 this year and then switch to 'after tax (non Roth)' in order to make additional contributions (with the intention of converting those after tax contributions to Roth). The plan also does a basic Safe Harbor match...dollar for dollar on the first 3% and then 50% on the next 2%. So I can get a total of 4% match as long as I contribute at least 5% (which I am definitely doing).

The plan also has a "true up" feature so that when I front load my contributions like this I will not miss out on any match. If I max out my contributions half way through the year and then stop contributing before I've received the full 4% match they will calculate the difference and dump in that extra amount after the end of the year to "true up" my match.

I ended up doing well and earning more than expected when the year began meaning I maxed out my pre-tax contributions at $19,000 early in the year and then I just realized that my 'after tax' contributions just went in excess of $37,000 for the year putting me over the combined 415c limit of $56,000. I asked my employer to remove $7,000 to get me below the limit and also allow for a couple thousand dollars of match that I should be due via the year end 'true up', but my administrator told me that they will only refund the exact dollar amount to cap me right at $56,000 today and that I will forfeit the additional safe harbor match that I would normally get in the year end true up because I'm already at the limit. Does anyone know if this is allowed in a Safe Harbor plan??

Answer 1

tl;dr: They are correctly following the 401k rules and I think you're out of luck in this case.

First off, I believe what your company is doing is a really nice perk, and relatively rare. Many companies don't offer after tax contributions, and even fewer offer a true-up feature at the end of the year. Consequently, employees that wish to max out their contribution ($19K) must carefully calculate and spread out their contributions so that they just hit it on their last paycheck, just so they have a contribution amount that can be matched. This becomes especially tricky if you select a percentage and also receive an unknown amount of bonus in the last paycheck.

To help avoid this, some companies choose the other Safe Harbor option which is a flat paid percentage instead of a match, which also has the option of only paying a minimum of 3% instead of 4%. With this option even employees that elect not to contribute are still given their 3% (or more). Another way a company can make it easier for the employees is the true-up feature like you have. This is (likely) a manual process where at the end of the year they calculate how much match you would have been given had you spread out your contributions over the entire year. The problem you've run into is simply that they can't add more because you've hit both your contribution match and the total max for employee/employer combined. 401k rules dictate that you can only undo contributions that put you over the limit, and this is why your company is saying you'll have to forfeit the final true-up.

However, there may still be a chance. The fact that they allowed you to over-contribute in the first place may mean their payroll processor isn't performing the check. So what they can do is (pretend your conversation never happened and) simply deposit the true-up at the end of year. Then you politely notify them shortly after that you went over $56k for the year (or they simply notice it happened) and then they can remove all the excess and give it back to you then. It wouldn't even affect your taxable wages since the refund has already been taxed. There is some grey area here as to whether this is legal. IMHO it is, because if no one noticed until after the final true-up that is exactly how it would have gone down. So I think this will come down to whether the company is willing to do it rather than if they actually can. That being said, it may be the case that part of the manual true-up process is performing the check, and if so, you're probably out of luck.

Maybe next year you can go easy on your after tax contributions and can do your own manual true-up at the end of the year to max it out. Or you can simply change your contribution to a set amount per paycheck rather than a percentage.