How does the IRS handle 401k excess contributions with employer match?

Question

My situation is a bit complicated:

Worked at company A, maxed out 401k in 2017 Left company A, rolled over 401k to IRA

Started at company B. Told company B to not contribute to my 401k in their on boarding process. They did not contribute to my 401k for my paychecks to start... But, I checked my contribution for 2018 on Fidelity's site and it must have reset the contribution, because my last paycheck of 2017 there was a $2800 contribution to my 401k.

I know I can tell my employer to take it out -- but my employer has a 1/1 match (up to an amount over the $2800), so I'm wondering if it would be advantageous to pay taxes and fines on the $2800 contribution for an additional $2800 match from my employer. I don't know when the match is added, or if I'll have to pay it back if I have to distribute the $2800 contribution next year. I can't go back to my old employer's plan to ask for a distribution because, again, I rolled that over immediately to an IRA (lesson learned, do not do this with mid year job changes.)

Thoughts? I'm not interested in messing with the law here, just interested in the best way to handle this -- esp since I'm eligible for the employer match, expect I had maxed out my contributions at the earlier company.

Answer 1

A couple of observations:

1. If the paycheck has a date on January 2018 then the salary, 401K, and contribution from the company are for 2018.

2. Some companies auto enroll their employees into the 401K. Though there are ways to prevent this my explicitly filling out a form and setting your contribution rate to 0% or $0 per month.

3. Some companies automatically make a company contribution. Some do it per paycheck, some do it in a lump sum. The lump sum contributions frequently are done in the last paycheck of the year or the first check of the new year. If somebody resigns before that check, they don't get the company contribution.

The IRS considers two types of Employer contributions

Employer contributions

Employer matching contributions. If the plan document permits, the employer can make matching contributions for an employee who contributes elective deferrals (for example, 50 cents for each dollar deferred). Employer matching contributions can be discretionary (contributed in some years and not in others, depending on the company’s decision) or mandatory, as in SIMPLE plans and Safe Harbor 401(k) plans.

Employer discretionary or nonelective contributions. If the plan document permits, the employer can make contributions other than matching contributions for participants. These contributions are made on behalf of all employees who are plan participants, including participants who choose not to contribute elective deferrals.

Many employees are concerned about the maximum contribution they can make. This total of $18K in 2017 and $18.5K in 2018 includes all employee contributions made to all employers. But there is another limit that is less understood, how employer contributions fit into these limits.

From retirement topics-401k and profit sharing plan contribution limits

Overall limit on contributions

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

• elective deferrals (but not catch-up contributions)

• employer matching contributions

• employer nonelective contributions

• allocations of forfeitures

The annual additions paid to a participant’s account cannot exceed the lesser of:

1. 100% of the participant's compensation, or

2. $55,000 ($61,000 including catch-up contributions) for 2018; $54,000 ($60,000 including catch-up contributions) for 2017.

However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan (see Employer Deduction in Pub 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

So it appears that Company B, can contribute $2800 as a nonelective contribution for 2017, even if you make $0 contributions yourself.