Expert: Shirley McAllister, CPP, PHR - 8/5/2011

Question
QUESTION: Hi...I was just notified by my employer that we exceeded our 401k deferral for 2010.  Since it is well past the April deadline to correct, and as I am considered a HCE, I will receive a distribution and pay a 10% penalty.  It seems as if the over contribution is 100% my employer's fault, but I'm getting penalized.  Should I ask my employer to cover the penalty, or do you know of what obligations the employer has?  Or is this just something the employee is stuck with?  Thanks for any insight you can provide.

ANSWER: Your employer is not obligated to pay the penalty, you can ask and see if the employer will do so.

You need to sit down and figure out how much you can contribute to your 401K without penalty and keep track of what you have contributed so you do not contribute too much. Your payroll department simply takes the amount you sign up for to contribute and withholds it and sends in to the 401K administrator.  

They could have received a report at the end of the year saying that you had over contributed and let you know at that time, but it is not their job to keep track of each person's amount they contribute.

Shirley

---------- FOLLOW-UP ----------

QUESTION: Thanks for the response Shirley.  I do track my contributions and they are always based on maxing out to hit the $16,500 limit - no more no less.  I should, however, have provided a few more details.  Our company failed the ADP test.  The problem I have as an HCE (and a non-principle) I have no way of knowing what the rest of the company is contributing.  If it is not the company's job to track and report on it in a timely manner how could I possibly know the contribution rate of non-HCEs in order to set my own personal contribution (since I can only contribute 2% over their savings rate) and avoid going over?

My only alternative would be to contribute token amounts throughout the year and then at the end of the year ask the company what my limit is and try to somehow max out then.  I'm expected to not go over, but must do so without ANY information that would let me know what that "over" number really is or am I missing something?  If I don't have access to the information, and it's not the company's job to monitor their position w.r.t. the ADP test, how can I possibly set my contribution amount? Thanks for any additional comments!

Answer
If you keep in contact with the payroll department throughout the year they can look up on their computer and tell you how much you have contributed. Go ahead and do it the way you are doing it now, however, start checking in Oct, Nov, Dec and when it starts getting close to the amount you are allowed to contribute perhaps you can stop your contributions. We did not have the equipment of manpower to manage each employee's balance. We did get a report in December and if anyone was close to reaching their limit we let them know so they could stop their deductions in December.

If you are over 50 and you plan allows you can contribute an extra 5,000 as a catch up benefit.

assuming your plan permits these contributions and you are age 50 or older: You may make an additional $5,000 pretax contribution to your 401k plan, on top of your regular pretax contribution limit. Starting in 2007, the $5,000 limit will be indexed to inflation (in $500 increments). By the way, the catch-up provision will expire along with the rest of the tax bill in 2011, unless Congress extends it.

It expires in 2011 unless it is renewed. You might have the company check on that as you could be eligible to contribute more.

Shirley