Retirement Refund

Today TaxMama hears from Gordon in Maryland who tells us, “I have a problem with a 401K distribution that I rolled over to an IRA in March of 2004. I had this 401K with a previous employer and left the money in the account after I terminated employment with the company. When I saw a chance to consolidate the 401K accounts, I rolled all of them into a Traditional IRA in 2004.

Last week I received a letter from a bank, which oversees the 401K account, saying that their auditors found that the distribution to me was in error and I received money from an employer match that I was not entitled to and they want it returned. That money is currently in my IRA and I had assumed that the rollover distribution from the 401K was clean. Now I know that part of the money in my IRA is not mine, and should be returned. Everywhere I look in the IRA instructions talks about penalties and amended tax returns. How can I extricate myself with the least damage, because I don’t feel any of it is my doing?”

Dear Gordon,

OK, when I publish this reply, I just know people are going to yell to me…(tax pros and employers and plan managers) but…

What the heck kind of idiot organization is this that comes to you two years after the fact and asks you for this money?

I see so many problems with this demand – none of them being your problem.

First of all, it’s up to your employer – and the administrators working for your employer – to get their act together in a timely fashion. Two years is not timely. In fact, employer matching funds and vesting periods should have been properly calculated before they ever released the money to you.

Second, as far as I know, the common-law statute of limitations to sue under most contracts is two years.
(Think of the retirement plan as a contract.) They’ve even exceeded that. Naturally, each state will have its own statutes.

Third, if you don’t want to give it back, how are they going to collect it from you?

Fourth, if they were to sue you for the return of the funds? Just pause a second and think, even if the judge accepted the case, if the time to sue hasn’t expired, how will the judge react to this suit? I mean, even if you didn’t even prepare and just walked into court and shrugged…and said, “Huh? I don’t understand why I owe this. Shouldn’t they have kept proper records?” The judge would just look at them and scratch his head and agree with you. With just a little digging and reading of contracts, you’d probably prevail.

Fifth, if they threaten to issue you with a 1099-C (cancellation of debt) – tremble. Big deal. What’s the difference, tax-wise between a 1099-C and a 1099-R (which you would get for drawing the money out of your account? Not much – except that you won’t have to try to explain away any early withdrawal penalties to IRS or your state.

Frankly, if it were me receiving that request, I’d just ignore it and not even respond. Of course, I’d never advise you to do that! Use your best judgment.

Of course, you could negotiate with them to pay your penalties and any taxes you will now have to pay as a result of drawing this money out. (There’s undoubtedly a code to avoid the penalties – but you’ll still owe taxes.)

Frankly, there’s no reason for them not to have made this computation in a timely fashion. Just carelessness.

And remember, you’ll find answers to questions about demand notices and all kinds of tax issues, free. Where? Where else? At

  • Ask TaxMama :: Where taxes are fun and answers are free

File Download (3:38 min / 0.8 MB)

Leave a Reply