401k / HCE non-discrimination test not completed after leaving the company
Hello – for 15 yrs I invested into my company 401k. For the approx 8 yrs of that time I was designated a Highly Compensated Employee and was limited on how much I could save based on the non-discrimination test. I usually tried to plan from past year how much I could invest and at the age of 50 added the catchup. During years 2021 and 2022 the company I worked for didn’t conduct this test. I left the company in July of 2022 and rolled my funds from the Fidelity company 401k into my Vanguard IRA in April of 2023. During that time I had asked senior leadership if the non-discrimination testing was going to happen. No reply. In October of 2023 I get letters from Fidelity indicating that they were catching up on the testing and I had overpaid into my 401k to the amount of approx $8k. During a call with Fidelity and my previous companies benifits admin I was told Fidelity was sending a 1099 for the 401k adjusted rollover and separate 1099’s for the amounts equal to the $8k. They then directed me to call Vanguard and ask for a dispursement of the $8k. As I assumed Vanguard will not disurse the overpayment without also sending me a 1099. How do I avoid paying double taxes. Fidelity refuses to not send the 1099’s for the overpayment. Any thoughts on this and how to handle come tax time?
Terry Says
Wow! I think you need a benefits attorney for this. The threat of a lawsuit could force the company to “gross up” your 40l(k) with an amount equal not only to the $8,000 they cost you, but the taxes on it that you will be forced to pay.
Once Fidelity sends you a 1099, you will likely never get the IRS off your back for taxes on that amount. The only responsible party here, beside yourself, is the company. And if they did this to a lot of people, there’s the possibility of a class action lawsuit! That should make them act responsibly to correct the results of their error.
And, you could also make a complaint to the Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL). Actually, I think this should be your first threat to the company, even before contacting a pension attorney. They know what a hassle it will be to deal with EBSA on their error!
