posted: Aug. 6, 2011 @ 11:51p
Short Version: In 2009, Employer laid off my wife, she requested distribution of 401k, received both vested and non-vested portion of employer contribution. Rolled over to Fidelity IRA, now employer wants non-vested portion back. What is the best course of action?
Long Version: In Feb 2009, my wife was laid off from a small 4 person business. She requested her 401k distribution so she could roll it over to an IRA. She received a check for $7k. A month later, the Employer called her up and said that she only got the profit sharing distribution, not the 401k distribution. They sent another check for $10k.
In Jul 2010, the Employer's accountant emailed my wife and told her that they accidentally distributed her both the vested portion and non-vested portion of the employer contribution and that they wanted to do a trustee to trustee transfer with Fidelity to get back the $5800 overpayment. My wife emailed them back and said that she wanted all the quarterly statements that show how much was vested and how much wasn't and any gains or losses during this time. She also told them that we would approve the trustee to trustee transfer if a) there was no money out of our pocket beyond the non-vested portion and b) that we receive a statement saying that they would not come after us for more money in the future if they found that their audit was incorrect (based on the small amount of paperwork she received I actually calculated that they actually should be getting back close to $7k, their accountant was BAD at math)
We received paperwork from Fidelity about the request for the transfer, but never got a response from the employer. My wife emailed them again reminding them of what we requested. No response.
Cut to July 2011 and the Employer asked if we knew why the transfer had never happened. We explained to them what we asked for a year ago. They responded back that sorry they never responded, it must have fallen through the cracks, they gave us sub-par quarterly statements, agreed to pay any fees and would not request more funds in the future. (The quarterly statements still had the errors in them, but to my wife's favor, so we decided to go ahead). In the mean time, she has also gained 27% since the money was deposited.
We called Fidelity and they said the only thing we could do was file an excessive contribution form, which would incur a 6% per year penalty from the IRS, 10% early distribution penalty and of course any income taxes associated with the distribution. We explained to them that the money would not be coming to us, but going directly back to the employer. They said they understood but this was the only route that was possible because it is a new tax year.
We have sent an email to the employer explaining what Fidelity described to us. We have not gotten a response. We are fully willing to give the money back as the official pension/401k policy was that she was only 20% vested, we just don't think it should cost us any money or significant time to make the employer whole.
a) Is Fidelity correct that this is the only way we could get the money back to the employer? They did offer that we could do some tax amendments and say that we contributed to a non-deductible IRA and that would absolve us of some but not all of the penalties, but this would still cause time and money to be spent.
b) If Fidelity is correct, how much do we ask from the employer to make us whole so we aren't out any money because of these penalties?
Thanks in advance for the advice!