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Employment Law/Unauthorized 401k deductions


When I started with the subject company they did not send me to San Diego to fill out and complete a new hire package.  This package contained an authorization to take out 401k contributions.  I did not notice the deductions for about six months and when I did I asked them stop the deductions.  They did stop the deductions.  When it came time to file my 2011 tax returns my financial advisor (really a friend at a investment company) said I should start up my own 401k.  I did that by making a $5,000 contribution to be effective for 2011.  Later I found out that I was not allowed to start up my own 401k because of the company sponsored 401k.  I was penalized by the IRS $1,980.  I have not heard from the California Franchise Tax Board yet.

I have been in email contact with the subject company.  The final email I asked for the signed authorization for the 401k deductions.  No email was returned.  Now was the signed authorization because there was none.

So my question is do I have a good case of taking the company to small claims court for the $1,980?  I no longer work with the company and am now retired.

You will not be able to sue the company for the 1980.00 amount that you had to pay the IRS.

If anything you would have to get the DOL involved and if the deductions were found to be taken illegally they would make the company pay you back the amount of deductions for the 6 months and than they would have to redo your W-2 and add the money on as taxable because it is not taxed when it is deducted.

One reason they might not do this is if the state allows a policy of automatic 401k signup. This is becoming popular with many companies and it is legal in most states. If the company has an automatic sign up policy all new hires are automatically signed up and have to ask to be taken off the 401K list.

If this is not the case than they may take the first route.

If have to say this even though I know you do not want to hear it, but your Financial Advisor should have known this and he should not have advised you to take out a personal 401k.  The authorities (IRS) could come back on him for giving you bad financial advice. Not knowing is no excuse as this is a question he should have asked before setting you up with a 401K.

Also the court would ask why it took you 6 months to catch the error and maybe fault you partially for this. If you got regular check stubs this would be a  question that would come up.

I am thinking you were charged the IRS charges on the 2nd 401k you started which was not allowed. This would not be the company's fault but the fault of your tax advisor. You possibly could sue him for giving you bad advice.


P.S. I might note that your financial advisor should have had you roll over your company 401K into your personal 401K and then there would be no tax problems.  I have always had a tax advisor ask if I had any other 401K's to roll over into the new one. I would fault his advice.  

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Shirley McAllister, CPP, PHR


I can answer questions about payroll laws and payroll tax laws and Human Resource laws and agencies. I can answer federal payroll and human resource law questions and most states; I do not have a knowledge of the local taxes for cities and counties within the state. If and when I can I will try and send you the website where you can reference the answer and where you can obtain more information as well as a contact number if needed for that particular agency. Some agencies I have worked with are IRS, Department of Labor (federal and state), Revenue Canada (and provincial governments), Inland Revenue, OSHA (0ccupational Safety and Health Administration); Social Security Administration and National Child Support as well as other agencies in Payroll and Human Resources. Some Laws I am particularly familiar with are FLSA (Fair Labor Standards Act), ADA (Americans With Disabilities Act), FMLA (Family Medical Leave Act) COBRA (Consolidated Omnibus Reconciliation Act ) , QDRO's, QMCSO's, and other support orders and garnishments, USERRA (Uniformed Services Employment and Remployment Rights Act,PPA Act (Pension Protection Act of 2006, As well as most other employment type acts. I am also well versed in the Title V Civil Rights Act and the HIPAA (Health Insurance Portability and Accountability Act).


30 years in Payroll and Human Resources

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