Misclassified as highly compensated employee (HCE) in 2023 -> 1099-R excess 401k contribution

Forum|Forum|1 year ago
January 29, 2025
2 replies
0 views

Hi.

3/2024 received check and letter from my 401k administrator stating that in 2023 I was considered an HCE and XXX amount of my 401k contribution was being returned to me. At that time, I did not know that it was not applicable, and I deposited said check into my bank account.

01/2025 received 1099-R with regards to the above return of this 401k contribution.

Facts:

-2023 gross earnings per my W-2 was $147,782.07

-The requirement to be considered an HCE in 2023 was $150,000

-In 2022, I was classified as an HCE by my employer, which was the correct classification, but employer never removed this classification, if they were supposed to do that.

Current status:

1) I have reached out to my 401k administrator and HR and they keep stating the other party is responsible to correct this.

2) I have since sent a two unanswered lengthy emails to my HR rep stating that I need to be reclassified as a non-HCE for 2023, I'd like to return XXX amount to my 401k, have them file a corrected 1099-R showing no return of 401 contribution, and contact/file said corrections with IRS accordingly.

Questions:

1) How do I handle this if my HR or 401k administrator don't fix things?

2) If things are not corrected, and I have to file this erroneously prepared 1099-R, I will be paying taxes on that income. Is it better to do that and file an amended return after-the-fact, or file some miscellaneous form and state to the IRS that I was not an HCE and don't owe taxes on this returned amount of 401k contributions?

3) Who is the correct party to correct this - my employer HR/accounting dept., or the 401k administrator?

Thanks for any help.

Best answer by Have a nice day

I messed up on the title. It should be:

Misclassified as highly compensated employee (HCE) in 2024 -> 1099-R excess 401k contribution

dmertz

Employee

If they will not correct this, you would have to file substitute a Form 1099-R (Form 4852) showing the distribution as an ordinary distribution instead of a return of excess contribution. This form has an area to supply and explanation.

Separately, you could potentially get the distributed amount into a traditional IRA by doing a late rollover under IRS Rev. Proc. 2020-46. However, the circumstances don't exactly correspond to any of the listed reasons for missing the 60-day rollover deadline. Financial-institution error would be the closest acceptable reason, but the employer who made the error is not really a financial institution.

I imagine that correcting the error would be the responsibility of the entity that issued the Form 1099-R, that being the plan administrator. For the plan administrator to do their job at all, the plan administrator needs to know the amount of the employee's compensation and likely should be the entity determining the employee's status as an HCE.

Have a nice dayAuthor

Thanks for the response.

However, sorry if any confusion, this was not a 1099-R for an "excess contribution" but rather a notice of refund. My employer is trying to elude that I was an highly compensated employee (HCE) in 2023 and thus could not contribute the 2023 401k max of $22,500 because of non-discrimination testing/regulations pertaining to 401k compliance. It had nothing to do with an over-contribution to my 401k plan.

dmertz

Employee

A contribution that is in excess of what is permitted as a result of ADP/ACP testing still constitutes an excess contribution, but under a different section of the tax code. It's just that it's likely to be distributed under EPCRS and reported on the Form 1099-R with code E rather than as a return of contribution with code P or code 8. However, your position is that it doesn't constitute an excess contribution because you were not an HCE, in which case it should constitute a regular distribution that is eligible for rollover (absent the plan allowing the appropriate restorative payment and correction to the Form 1099-R).