Misclassified as highly compensated employee (HCE) in 2023 -> 1099-R excess 401k contribution

[Have a nice day]

Hi.

3/2024 received check and letter from my 401k administrator stating that in 2023 I was considered an HCE and XXX amount of my 401k contribution was being returned to me. At that time, I did not know that it was not applicable, and I deposited said check into my bank account.

01/2025 received 1099-R with regards to the above return of this 401k contribution.

Facts:

-2023 gross earnings per my W-2 was $147,782.07

-The requirement to be considered an HCE in 2023 was $150,000

-In 2022, I was classified as an HCE by my employer, which was the correct classification, but employer never removed this classification, if they were supposed to do that.

Current status:

1) I have reached out to my 401k administrator and HR and they keep stating the other party is responsible to correct this.

2) I have since sent a two unanswered lengthy emails to my HR rep stating that I need to be reclassified as a non-HCE for 2023, I'd like to return XXX amount to my 401k, have them file a corrected 1099-R showing no return of 401 contribution, and contact/file said corrections with IRS accordingly.

Questions:

1) How do I handle this if my HR or 401k administrator don't fix things?

2) If things are not corrected, and I have to file this erroneously prepared 1099-R, I will be paying taxes on that income. Is it better to do that and file an amended return after-the-fact, or file some miscellaneous form and state to the IRS that I was not an HCE and don't owe taxes on this returned amount of 401k contributions?

3) Who is the correct party to correct this - my employer HR/accounting dept., or the 401k administrator?

Thanks for any help.

[dmertz]

If they will not correct this, you would have to file substitute a Form 1099-R (Form 4852) showing the distribution as an ordinary distribution instead of a return of excess contribution.  This form has an area to supply and explanation.

Separately, you could potentially get the distributed amount into a traditional IRA by doing a late rollover under IRS Rev. Proc. 2020-46.  However, the circumstances don't exactly correspond to any of the listed reasons for missing the 60-day rollover deadline.  Financial-institution error would be the closest acceptable reason, but the employer who made the error is not really a financial institution.

I imagine that correcting the error would be the responsibility of the entity that issued the Form 1099-R, that being the plan administrator.  For the plan administrator to do their job at all, the plan administrator needs to know the amount of the employee's compensation and likely should be the entity determining the employee's status as an HCE.

[Have a nice day]

Thanks for the response.

However, sorry if any confusion, this was not a 1099-R for an "excess contribution" but rather a notice of refund. My employer is trying to elude that I was an highly compensated employee (HCE) in 2023 and thus could not contribute the 2023 401k max of $22,500 because of non-discrimination testing/regulations pertaining to 401k compliance. It had nothing to do with an over-contribution to my 401k plan.

[dmertz]

A contribution that is in excess of what is permitted as a result of ADP/ACP testing still constitutes an excess contribution, but under a different section of the tax code.  It's just that it's likely to be distributed under EPCRS and reported on the Form 1099-R with code E rather than as a return of contribution with code P or code 8.  However, your position is that it doesn't constitute an excess contribution because you were not an HCE, in which case it should constitute a regular distribution that is eligible for rollover (absent the plan allowing the appropriate restorative payment and correction to the Form 1099-R).

[Have a nice day]

Thanks dmertz so much for your expertise.

I had to look up what EPCRS. additionally, I looked back at the 1099-R, and there is no code listed. Yeah, I see in one aspect that if I was classified appropriately, then this would be considered an excess contribution. That does make sense. But yes, like I stated in my case, I am not an HCE.

I search an IRS publications, and I came across one which they had stated that the employer makes this election and it stays there until they revoke it. In my case, that HCE election was never revoked.

HR finally responded to me yesterday and stated that she had escalated the issue to the accounting department, and they reached out to the employee tax department. Let’s see what is the resolution.

Ideally, I’d like to put these funds back into my 401(k) since it was removed in error. What can I say or how can I persuade them that that is the correct restorative action?

at the time they made the distribution, I believe my 401(k) was invested merely in an interest income fund. Because they removed it, I lost that opportunity for that interest. How can I argue that they need to pay me that interest retroactively?

[dmertz]

I mentioned the late rollover to an IRA under the assumption that the employer would not be taking any corrective action.  Rev. Proc. 2020-46 also applies to late rollovers to a 401(k).

I was just reviewing the details of this thread.  Are you sure that you were misclassified?  As I understand it, an employee would be an HCE in 2023 if their 2022 compensation exceeded $135,000.

With regard to revocation, what I see is in regard to revocation of the election to include the requirement that to be an HCE the employee must be in the top 20% of compensation, not revocation of the HCE status of any particular employee.

[Have a nice day · Accepted solution]

I messed up on the title. It should be:

Misclassified as highly compensated employee (HCE) in 2024 -> 1099-R excess 401k contribution

[Have a nice day]

Thanks dmertz for the replies.

1) You just caught my error and shed more light on this situation. I completely messed. I have been misclassified as an HCE in 2024. And, further, this may have been a misclassification other years. But let me check my understanding with you.

As far as I understand, HCE classification on gross wages is based on the prior year. A Google search revealed:

2025 compensation threshold of $160k

2024 = $155k

2023 = $150k

2022 = $135k

2021 = $130k

2020 = $130k

I found the below here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plans-definitions#:~:text=...

Highly compensated employee – An individual who:

Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $125,000 (if the preceding year is 2019, $130,000 if the preceding year is 2020 or 2021, $135,000 if the preceding year is 2022, $150,000(if the preceding year is 2023 and $155,000 is 2024 if the preceding year is 2024 and, if the employer so chooses, was in the top 20% of employees

I am not understanding if it is based on prior year earning, b/c why does the the IRS, in what I paste, state for instance $135k if the preceding year is 2022?

Isn't it for 2022 $135k but based on 2021 earnings (meaning one has to earn >$135k in 2021 to be classified as an HCE in 2022?)

Now this has got me wondering and trying to decern if my employer correctly classified me any other year. This has got me going a lot deeper in a tax worm hole than I imagined.

So it's not revoking of an employee's classification, but rather revoking this whole HCE non-discrimination testing? What I linked previously reads like it applies to revoking an employees classification in my interpretation.

[dmertz]

The only revocation I'm aware of is the employer's option to require that to be an HCE the employee must be in the top 20% of earners.

The COLAs for 2025 are already known.  As I understand it, the 2025 threshold of $160,000 will apply to 2025 compensation in determining if an employee is an HCE in 2026.

[Have a nice day]

Got it. OK now I think the water is finally getting a little clearer.

I’m curious to see what my employer’s resolution will be and if my contributions is going to be able to get returned to my 401k somehow, or just chalk this up to their error.

i’m not keeping my fingers crossed because of their prior mismanagement of commuter fringe benefits, and that not getting removed from my wages and having to fight tooth and nail to get that corrected back in a prior year.