Question: Apparently I put too much money into our retirement plan this year. Can I just pull it back out?
Answer: The government will penalize an employer for not putting enough money into a retirement plan and they will also penalize an employer for putting too much into the plan as well. If an overpayment occurs, your ability to pull the funds out will depend upon if the amount was employee or employer money.
Employee Overpayment into a Retirement Plan
Sometimes an employee will receive too much in their 401(k) account when the payroll system fails to limit the dollar amount allowed by the IRS for the year or if the payroll department has a typo when remitting the funds to the asset custodian. If there is an actual typo (example: $1,200 is remitted instead of $120) and if the plan document allows for a removal of this type of “mistake of fact” error, then the overage can be returned to the company as long as it is corrected within 12 months from the deposit. Not all plan documents have this “mistake of fact” language so if it isn’t in there, the only choice will be to forfeit the overpayment to the plan’s forfeiture account. When the payroll system fails to limit the amount withheld from a participant’s paycheck and it exceeds the dollar amount for the year allowed by law, it is allowable to withdraw the funds from the custodial account and refund the overage to the participant. This refund will become taxable to the participant.
Employer Overpayment into a Retirement Plan
If an employer contribution is overpaid in error, the amount can be returned to the employer if it meets the circumstances to be considered a “mistake of fact” if the plan document allows for such a refund. However, the non-deductibility of a contribution alone is not enough to be considered a “mistake of fact”. If the amount involved is an overpayment of employer contribution, there is a 10 percent penalty for overfunding if the total employer contribution for the year exceeds 25 percent of eligible employee gross compensation. This penalty is to prevent a company from hoarding excess cash in a tax deferred retirement account all year where it makes tax deferred earnings and then pull it right back out. If an overpayment occurs and it is not appropriate to classify it as a mistake of fact, you must carry forward the overpaid amount into future years and allocate it until it is gone. You are allowed to deduct it as it is allocated but the company won’t get to deduct it the year it was funded if it exceeds that 25 percent deduction limit.
For additional information on managing company retirement plans, see Company Retirement Plans Made Easier or Benefits of Participant Directed Retirement Plans.
