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401K plan fails ADP test, participant receives distribution?

After 28 years with the same company I retired in Sept 2011 at age 58. Due to a severance package and vacation accruals I asked to place the max I could in my 401K plan, I placed $16,280 in the plan when I retired in Sept. Last week I was notified that I had contributed too much and received a check for $5764. The odd thing is that the letter stated I had over contributed by $6653 however there was a penalty (loss) of $861. My issue is that after I placed money into the 401 K in Sept it went on to earn a return of 10.68% through Dec 31. Am I correct that I should have received the original $6653 that was in excess plus $707 of gains. Why the $889 loss? I spoke with the IRS and they stated that losses and gains were managed by the plan administrator.

Regards

Brian Whelan

Mar 20, 2012 by Brian from Austin, TX in  |  Flag
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4 votes

I recently had a participant receive a distribution from an excess 401k contribution for 2011. The TPA (Third Party Administator) Recordkeeper used the loss from the portfolio for the year. Like you, the participant was looking at the stellar 4th quarter returns and was not happy with the loss being deducted.

As Donald stated, you may be able to state your case to the TPA, but they will not be very accommodating to your request and admit their mistake. This is the time where a good advisor to the plan can make a difference and fight for you as well.

Comment   |  Flag   |  Mar 21, 2012 from Lititz, PA

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Don Level 19

Brian, you need to understand what formula the administrator used to determine the loss. Very likely they employed a formula that assumed your excess contribution occurred over the course of the year, rather than all at once. If you are able to provide convincing math that you were treated unfairly, then this should be made right. Having a friend in your former company's HR department might help. But don't underestimate the bureaucracy (and ignorance) that you might confront. I suspect you will have to work hard for your money.

Comment   |  Flag   |  Mar 20, 2012 from Middlebury, VT

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Brian - You should speak with the Plan Record Keeper or Plan Administrator about this. The Record Keeper should be able to account for every inflow and outflow associated with your account, including the effect of gains or losses related to any excess contributions. If you can show that the accounting has been done incorrectly, the Record Keeper and Administrator will be obligated to correct the mistake.

1 Comment   |  Flag   |  Mar 20, 2012 from San Francisco, CA
Guy

Your fact situation is a confusing. Having the plan refund your overage is not unusual. I have never seen it cause a penalty. So I definitely would ask why? As to your gains, it would seem logical you would get the prorata amount as an excess distribution while the gains on the amount that remained in the plan would stay there. You should definitely sit down with the TPA and have them explain to you how they determined the sums involved. Seems from the facts there is an error here. Hope this helps.

Flag |  Jul 28, 2013 near Irvine, CA

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Steve Casull Level 13

Brian, if you instructed the payroll department to deposit the "max into your 401K" and the amount they deposited caused a penalty, I do not see how this is your mistake, and therefore shouldn't be paid by you.

Comment   |  Flag   |  May 19, 2015 from South Jordan, UT

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Brian, I agree with Guy. You are stating Penalty and loss. This two words are totally different and construed to be ambiguous in format. Your Plan administrator/record keeper takes distribution elected by you via thru employer, or in this instance plan Trustee. If it is a loss, then should show which funds under-performed related to the market. Be aware that fees such as but not limited to fund management fees, concession fee, b12 fees may not be shown in your statement and when determine growth based on overall portfolio, is important to know that substantial amount of that goes into this hidden fees that sometime plan administrators or trustees fail to educate their employees. Ask your Advisor to give you a total fee disclosure given to the plan trustee at the beginning of each year. If you Advisor does not know how to explain these fees than hire an independent Advisor that can explain each fund in your portfolio in relation to their total expenses deducted from your overall portfolio growth. I hope this helps!

Comment   |  Flag   |  Jan 26, 2016

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