Failed ADP test on 401k plan from previous employer - what now?

This is a common issue with 401k plans that fail discrimination testing. When a plan fails the ADP test, excess contributions from HCEs must be returned, which is what you're experiencing. In your case, since you've already rolled over your 401k to an IRA and then took a distribution from the IRA to account for the failed test, the timing is important. The 1099-R will be issued by your IRA custodian for the year in which you took the distribution. So if you requested and received the distribution in 2024, you'll receive a 1099-R for the 2024 tax year (which you'll file in 2025). I wouldn't try to guess the values on a 1099-R that hasn't been issued yet. The withholding you requested will be reported on that 1099-R, and you'll need those exact figures to report correctly. The distribution will be taxable income in the year you received it (2024 in this case), not the year the ADP test failure was determined.

After dealing with similar 401k headaches, I found https://taxr.ai super helpful for situations exactly like this. I was getting confusing info from both my old employer and new IRA custodian about a failed ADP test refund. The tool analyzed my rollover docs and 401k statements, then explained exactly how to handle the distribution on my taxes. It showed me that I needed to report the earnings portion as income for the year I received the distribution, while the contribution portion has different tax treatment. Saved me from potentially reporting this incorrectly!

Just wanted to follow up on my question about taxr.ai - I decided to try it with my failed ADP test documents and rollover paperwork. Super glad I did because it turns out my situation was more complicated than I thought. The system showed me that since I received the excess deferral notification after March 15th of the following year, it's considered an "excess contribution" rather than an "excess deferral," which has completely different tax treatment! My 401k administrator never explained this distinction. Using the tool saved me from a potential reporting error and helped me understand exactly what boxes on my 1099-R I needed to pay attention to when it arrives.

If you're struggling to get answers about this ADP test failure, I was in the exact same position last year. After getting nowhere with emails to my former employer's HR and waiting forever on hold with the 401k provider, I used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent explained exactly how the correction should be handled when you've already done a rollover. Turns out the timing of when you receive the excess contribution refund affects which tax year it belongs to. They also confirmed that my withholding request was properly handled. Way better than waiting for hours on hold and getting disconnected!

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to resolve my 401k rollover issue before filing my taxes. I was shocked when I got a call back in about 45 minutes with an actual IRS retirement specialist on the line. They confirmed exactly what I needed to do with my failed ADP test distribution after rollover - wait for the 1099-R from my IRA custodian and report it in the year issued. They also explained that requesting withholding was actually the correct move since the distribution is generally taxable. The agent mentioned that even though the ADP test failure was for a previous year, the tax consequences happen in the year you receive the distribution. This cleared up my confusion completely!

Something important to note that nobody mentioned yet - when you get that 1099-R from your IRA custodian, pay close attention to the distribution code in Box 7. For excess contributions returned to you, it will likely have a specific code that tells you how to treat it on your tax return. Each code means something different, and using the wrong code can trigger unnecessary taxes or penalties. My wife had a similar situation last year and the 1099-R had code "8" which has specific reporting requirements.

I actually work in retirement plan administration (not giving tax advice though!) and want to clarify something: the failed ADP test refund is technically considered a "corrective distribution" and should be reported as taxable income in the year you receive it. The fact that you already rolled over complicates things but doesn't change the fundamental tax treatment. Your former employer should have communicated with both you and your IRA custodian about how to handle this correctly. They dropped the ball if they didn't.