Author Topic: Expert Help? Excess 401(k) $ dumped into a 401(a)? Bad? Ok? Ugh...  (Read 1575 times)

Paradise

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Looooooong time lurker - great help from you guys along the way! Now a question I haven't seen:

- DH's employer matches 401(k) contributions only in each pay cycle (bi-weekly) - so we try to time and gauge contributions so we hit the yearly max on the last of the 26 paychecks to maximize the company match received.
- The (very large) company's payroll system does not automatically limit contributions - this totally bugs me, but I digress...
- In 2013, $150 in "excess 401(k) funds" from that last paycheck's contributions were apparently dumped into a 401(a) plan.

What's the deal with that? Should we have asked for it to be distributed by April 15 of this year? Will the eventual distribution of this be messy? Did we/will we get hit twice tax-wise on this piddly amount? (Think so...)
Any other issues/problems with this that might pop up? Anyone else seen this before and handled it?
Thank you 'stache folks!

kkbmustang

  • Handlebar Stache
  • *****
  • Posts: 1286
Re: Expert Help? Excess 401(k) $ dumped into a 401(a)? Bad? Ok? Ugh...
« Reply #1 on: July 25, 2014, 03:59:34 PM »

- In 2013, $150 in "excess 401(k) funds" from that last paycheck's contributions were apparently dumped into a 401(a) plan.

What's the deal with that? Should we have asked for it to be distributed by April 15 of this year? Will the eventual distribution of this be messy? Did we/will we get hit twice tax-wise on this piddly amount? (Think so...)
Any other issues/problems with this that might pop up? Anyone else seen this before and handled it?
Thank you 'stache folks!

First of all, "apparently dumped into a 401(a) plan" leads me to believe there is some confusion as to how a plan works. Hopefully I can clear that up for you.

A 401(k) plan IS a type of a 401(a) plan. IRC (Internal Revenue Code) section 401(a) is the general section that sets forth all of the requirements an employee benefit plan has to satisfy in order for it to be tax-qualified (i.e., employer gets deduction now, employee gets to defer tax recognition until later). IRC section 401(k) is the subsection that provides for pre-tax employee contributions.

What I'm presuming happened here is that when your husband had "excess deferrals" (the amount that was deferred that exceeded the limit ($17,500)), the plan provides that they are automatically moved from the pre-tax deferral account to an after-tax contribution account. If this is the case, the plan's record keeper should be able to move the $150 (plus any attributable earnings spanning the time that begins on the date of deferral to the date of transfer) to an after-tax subaccount and the employee simply receives a notice of that fact.

Please note that these accounts are all just sub-accounts in the participant account. For example, a plan participant has an account in the Plan. That account can be subdivided into a pre-tax account (401(k)), a matching contribution account (401(m)), a profit sharing account (generally, 401(a)) and an after-tax account (I don't remember which code subsection, but in the 401 section probably). (Depending on what types of contributions the plan authorizes.)

In the alternative, a plan can provide that excess deferrals be distributed to plan participants (including any earnings on the excess deferral). This occurs by April 15th, because that's the cutoff date for employer contributions to be made to the plan (in other word, matching and/or profit sharing) be contributed to the plan, entitling the employer to a tax deduction. (This is totally different from the issue of how long an employer has to deposit employee deferral contributions.)

So, the plan can either do an automatic rollover to an after-tax account OR it can distribute any excess deferrals. This is all governed by the provisions of the plan. You don't get to decide which.

You should not get hit twice from a tax perspective. Your husband should ask the HR department what the plan provides. This happens regularly with benefit plans and is not a big deal. But, that being said, if the employer doesn't follow the plan's provisions, there could be some issues on both the participant and plan sponsor sides. Hope this helps.

Paradise

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: Expert Help? Excess 401(k) $ dumped into a 401(a)? Bad? Ok? Ugh...
« Reply #2 on: August 02, 2014, 07:08:41 AM »
Thanks! Mr. P says this info helps immensely.