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My company switched 401(k) provider in Q3 of 2016 and at the time of the switch I've already contributed $15K Roth into the account for the 2016 calendar year.

Then came the notice that I've failed the Highly Compensated Employee Rule and $4,000 was returned to me via a forced distribution.

I then started contributing to the new plan and by the end of the calendar year I've contributed $3,500 Roth to the new plan.

My question is, did I go over the annual IRS limit of $18K and had to withdraw $500 from the account prior to the tax filing deadline? Or am I OK since $4,000 was returned to me due to failing the Highly Compensated Employee test?

  • The refund was based on a 2016 tax year failure, and was processed in 2016? – Joe Mar 7 '17 at 17:05
  • Yes the refund is based on me failing the test in 2016 and processed in 2016. – Vith Mar 7 '17 at 17:27
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Well first of all, you didn't fail the Highly Compensated Employee Rule, your company did. That rule requires that "highly compensated employees" don't contribute more, percentage wise, then the rest of the company. If they do, the company has to refund enough of their contributions to make the two roughly equal (within about 2% from what I can tell). The goal is to ensure that your company's plan benefits all employees; not just those that are high earners.

That refund essentially reduces your aggregate 401(k) contribution amount, so your total net 401(k) contributions for the year should be $14,500 ($15,000 - $4,000 + $3,500).

I would be more concerned that non-HCEs in your company are not contributing. That may limit how much you and other HCEs can contribute going forward, Hopefully your plan administrator is looking into this and coming up with ways to incentivize more non-HCE participation,

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    This can also happen when a company has a high percentage of low-paying jobs. I used to work at Amazon and I had a forced distribution from my 401k every year. I believe it was because a high percentage of Amazon employees work in fulfillment centers, which are low-paying jobs. – gaefan Mar 8 '17 at 12:31
  • The plan we switched to is a Safe Harbor plan so I think we are good to go moving forward. – Vith Mar 9 '17 at 13:35

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