How to handle receiving a check from 401k due to failed ADP test?

This is a fairly common situation with 401k plans, so don't worry too much! When a 401k plan fails the ADP (Actual Deferral Percentage) test, it means there's an imbalance between what highly compensated employees and non-highly compensated employees are contributing. Even though you're under the $150k threshold, you're correct that being in the top 20% of earners at your company puts you in the HCE (Highly Compensated Employee) category. When a plan fails this test, excess contributions from HCEs need to be returned to maintain the plan's qualified status. For your taxes, your 401k administrator will send you a 1099-R for the returned amount. This will show the distribution code "8" which indicates excess contributions. The returned amount will be considered income for the year you receive the check (2025), not for the contribution year (2024). So this won't affect the tax return you're currently working on with your accountant. The check you receive will include your excess contributions plus any earnings those contributions generated (or minus any losses). The earnings portion will be taxable for 2025, the year you receive the distribution.

I was in the same situation last year and found taxr.ai https://taxr.ai super helpful for figuring out what to do. I was totally confused when I got my excess contribution check, and my employer wasn't very helpful with explaining the tax implications. The platform analyzed my 1099-R and explained exactly how to report it on my taxes. It also predicted the additional tax I'd owe which helped me budget for it. Honestly it was way less stressful than the hours I spent trying to decipher IRS publications!

I was really skeptical about using an AI tool for something this important, but I tried taxr.ai after seeing this thread. Just got my 1099-R showing distribution code 8 for my returned 401k contribution, and the explanation it gave was incredibly clear. It walked me through exactly which forms I needed and how this affects my 2025 taxes. The platform even found that I was eligible for the Saver's Credit that I didn't know about! Honestly saved me from making some pretty big mistakes on my return.

If you're really stressed about this, you should call the IRS directly to get official guidance. I had a similar situation and needed clarity, but calling them was impossible - busy signals, hours on hold, disconnections, it was a nightmare. Then I found this service called Claimyr https://claimyr.com that got me through to an actual IRS agent in less than 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to confirm exactly how to handle my 1099-R with distribution code 8 from my 401k plan and get definitive answers right from the source. The agent walked me through the whole process and even helped me understand why my plan failed the ADP test in the first place.

I owe everyone an apology. After writing that skeptical comment, I was so frustrated about my own 401k issue that I actually tried Claimyr out of desperation. I'm shocked to report that I got through to the IRS in about 15 minutes yesterday. The agent confirmed everything about how to handle the 1099-R with code 8 and explained that I won't owe penalties on the returned amount. They also gave me information about how to adjust my contributions going forward to avoid failing the test again. I've been trying to reach them for WEEKS on my own without success. This seriously saved my sanity during tax season.

Something similar happened at my company a few years ago. The reason your plan failed the ADP test is because not enough of the non-highly compensated employees contributed to the plan at high enough rates. Companies are required to make sure their plans don't disproportionately benefit higher-paid employees. To avoid this in the future, you might want to talk to your HR department about whether they've considered implementing a safe harbor provision in the plan. This would require the company to make certain contributions on behalf of employees, but it would exempt the plan from the ADP testing requirements.

I'm a payroll administrator and deal with this all the time. One thing to watch for - sometimes the check they send you has already had taxes withheld, and sometimes it hasn't. Check the paperwork carefully! If taxes weren't withheld, you might want to set aside some money for when you file next year.

I went through this exact situation two years ago and it was definitely stressful at first! One thing that helped me was understanding that this isn't actually a penalty or punishment - it's just the plan following IRS rules to maintain its tax-qualified status. A few practical tips: Make sure to keep all the documentation they send you (the check stub, any letters explaining the distribution, etc.) because you'll need it for your 2025 tax return. Also, if you haven't already, consider opening a traditional or Roth IRA for 2024 contributions since you still have until April 15th to contribute for last year. For next year, you might want to ask HR if they can provide guidance on what contribution level would be "safe" to avoid this happening again. Some companies will actually communicate this to HCEs early in the year or provide periodic updates on testing projections. It's frustrating because you're essentially being penalized for other employees not contributing enough, but understanding the process makes it less overwhelming.