The reason a person receives a 401(k) refund check is most likely that the employer’s plan has failed one or both of these tests, which prevents the employee from contributing above a certain amount. And that occurs when eligible participants in the company’s 401(k) plan are not contributing enough of their income, and employers are not contributing a significant enough amount on the employees’ behalf, either.
The reason why these so-called non-discrimination rules were initially put into place makes sense: to prevent owners and high-ranking executives from keeping the vast majority of company profits instead of paying better wages or offering retirement benefits to all employees.
However, many highly compensated employees — those who are currently making $120,000 or more — or long-tenured workers are not necessarily decision makers, executives or owners. There are also some companies where it’s just too difficult to make a 401(k) plan work, for a variety of reasons, including issues related to specific industries, economic cycles and the age of the company.
So the big question, of course, is, What should I do after I get a 401(k) refund check?
First, talk to your company’s benefits administrator to see if any changes will be made to the plan in the coming year. Such changes would include converting to a “safe harbor” plan, instituting a profit-sharing contribution, more education to inform employees of the benefits of saving for retirement or an automatic enrollment of all eligible employees.
Better yet, ask if a matching contribution, if not currently offered, will be made by your employer or whether, if there is a match already in place, it will be raised. If no changes will be made, it is unfortunately likely that you will receive a check back next year if you try to contribute the same amount.
The IRS does offer information on how to fix a 401(k) if it fails the ADP or ACP non-discrimination tests, but it’s not the easiest for most benefits administrators juggling multiple responsibilities beyond the 401(k) plan to understand. Employers should speak to a financial advisor with experience managing 401(k) and group retirement plans to determine the best course of action.