Shortly after DH’s company switched from a high cost retirement provider to Fidelity (which is a better choice for small companies than is Vanguard because Vanguard charges small companies pretty high fees, in case you were wondering), DH got a check in the mail from Fidelity for >$5K. As a distribution. Even though DH is well under any possible age for required distributions.
It wasn’t a mistake.
On the back of the statement, it said, “It has been determined that you had an excess contribution…due to your plans non-discrimination testing…”
The problem, as explained to DH by the company’s finance person and also in this post I found online is that DH’s company doesn’t compensate its less highly employees as well for retirement as it does its highly paid employees. And the highly paid employees are contributing to retirement compared to the less highly paid employees in too high a ratio. So they failed a non-discrimination test and send money back to highly paid employees so that the overall firm level of contribution no longer fails that test. It is our understanding that we will pay taxes on that money as if it is income in the 2017 tax year (though it is income from 2016).
So, DH can’t put away the full 18K + employer match (which is going away for the foreseeable future anyway) each year for retirement, but some number less than that. So it’s a good thing that I can put away large amounts in my university 403bs and 457 plans.
There is a way to make it so the company doesn’t have to pass the non-discrimination testing, but figuring that out and pushing for it didn’t seem worth looking into given the way that DH’s company is laying everybody off at the end of the month.
So, that’s one of the fun things about working for a small company.
Have you ever gotten a 401(k) distribution because your company didn’t pass non-discrimination testing?