Return of excess employer contribution after transfer to IRA

Question

A few years ago, I had an internship, and had to set up an account with the employer's retirement fund company.

A couple of years after leaving the company, I was closing out old accounts, and realized there was money in the 401k/403b from that job. I didn't think it was vested, but I called the investment company (Company A) to see about closing out the account. They assured me that the money was vested, and I could move it and close the account. I was dubious, and called again, and was told the same thing. So I moved it to my main IRA at investment company B.

Now, a couple of years later, I got a letter from the employer saying the money was contributed in error, and they need it back. They put in a "letter of indemity" requesting the return of funds to investment Company A, who passed it Company B.

Company B informed me that they won't take out the money without my permission, and said they can't return it directly to Company A anyway.

I'm wondering what my options are. It seems to me that the fault here is with either the employer or investment Company A. If it was just a matter of returning the money, I'd be okay -- it's not a life-changing sum (~1.5k). But it also makes a mess of IRS forms and excess contribution fees, accumulated over years.

Can I just refuse to return it? Can I return the money, but insist that Company A or the employer help sort out the IRS forms/fees?

Answer 1

This does not sound like an "excess contribution" under federal law. That happens when you contribute more than the federal cap (19000 for employee, 57000 for employee + employer contributions, assuming no catch up; possibly 1-2k lower depending on the year this actually happened).

I would not take the money out of a retirement account without involving a lawyer, and probably CPA, and perhaps not until they involve a lawyer to make you do it, as that may substantially complicate your taxes, potentially resulting in an unqualified distribution (as far as the IRS is concerned) resulting in taxable income + penalties.

If you want to be nice and they just want the money, there's a possibility of paying in post-tax (taxable) funds from a regular account, but otherwise this sounds like your (former) employer's problem, "so sue me" (lawyers are expensive, it's probably not worth the $1500).

Also note, given this may have been years now (the question is at least a year old, and some of the actions described are older than that), you'll also want to consider statute of limitations and IRS lookback period, assuming you have filed all your previous documents in good faith. Taking any action here can void some of those clocks, so act with intention.