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I just got a letter from my former employer stating that they had made an error in their 401(k) deductions in 2013. Briefly, they erroneously included my cell phone allowance as eligible pay for the 401(k). Since I was contributing 4% (and they were matching it), this means that they were also depositing 4% of my cell phone allowance tax-free into my 401(k), and matching it.

The total mistake works out to $55 ($27.50 of mine, and $27.50 employer-matched). They want me to remove the $55 from my rollover account, send it to their 401(k) broker, and then they will send me a check for $27.50 along with a 1099 since it is taxable.

Now, I've already rolled the 401(k) over to a traditional IRA with another broker. This is a small amount, sounds like it would be a hassle, and was their mistake. Am I obligated to do what they ask? What are the potential consequences to me if I don't?

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    Why don't you just send them a check for $27.5 and be done with it? Are you still employed there? – littleadv Jan 29 '14 at 4:53
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    I'd respond, telling them you'll comply, but your fee for time spent is $100/hr. Their mistake, but they are putting a burden on you that's far more than the dollar value of what they are trying to recover. – JoeTaxpayer Jan 29 '14 at 15:52
  • @littleadv: He says "former" so probably not. – Brian Sep 9 '14 at 16:37
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    @staticx - plus you can't rollover a 401(k) to an IRA until you leave the employer. – Jared Sep 9 '14 at 16:38
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Are you obligated to do what they ask? Probably not, with one big caveat discussed below.

Your employer sent your money and their money after every paycheck to the 401K management company. Then after a while the 401K management company followed your instructions to roll it over into an IRA. Now the IRA management company has it.

Pulling it out of the IRA would be very hard, and the IRA company would be required to report it to the IRS as a withdraw.

Here is the caveat. If the extra funds you put in allowed you to exceed the annual contribution amount set by the law, or if it allowed you to put more than 100% of your income into the fund, then this would be an excess contribution, and you and your employer would have to resolve or face the excess contribution penalties. Though if the 401K company and HR allowed you to exceed the annual limit they have a much more complex problem with their payroll system.

The bigger concern is why they want you to pull out your $27.50 and their $27.50. Unless you were hitting the maximum limit, your $27.50 could have been invested by adjusting the percentage taken out of each check. You could have picked a percentage to reach a goal. That money is yours because you contributed it and unless you exceed the IRS set limits it is still pre-tax retirement money.

The return of matching funds may be harder to calculate. The returns for 2013 were very good. Each $1.06 of matching funds each paycheck purchased a fraction of some investment. That investment went up and down, ok mostly up, if it was invested in the broad market. I guess you should be glad they aren't asking for more due to the increase in value.

It would be very hard to calculate what happened if you have moved it around since then. Which of course you did when you moved it into an IRA.

If the average employee was also given a $55 gift last year, then the suggestion to the employer is that the tax complexity you and your fellow employees face would exceed the cost of the extra funds. They should chalk it up to an expensive lesson and move on.

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You are legally able to contribute more than 4% to your 401(k) (unless you've hit the actual limit). There is no reason you need to pull out your "extra" contribution. So basically they just want their $27.50 back.

So offer (via email or writing) to send them a check. You obviously don't work there any more, so if they insist it comes from your IRA or are not willing to accept a check, tell them to @%#&* off (OK, not really, that would be unprofessional, but that's the general idea). They overpaid you by $27.50, and you are legally bound to return the extra pay, but not to put up with their BS. Tell them you've offered to pay, and if they don't want to accept a check, they can sue you for it to try to get it in the form they prefer (which they won't do, and even if they did, at most the judge would just tell you to write a check - which you offered from the outset, so they'd probably owe your legal fees).

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