What does a check from 401(k) Nondiscrimination Testing mean? Help me understand!

So I'm kinda confused right now. Just got this random check in the mail from Insperity (they handle our payroll) with a note saying it's for "nondiscrimination testing" related to my 401(k). I've googled this for like an hour and still don't really get what's happening. Did I mess something up?? For context, I try to max out my 401(k) every year and typically split contributions 50/50 between Roth and traditional. Our company is pretty small (under 20 people) and they don't offer any match at the moment. Is this a normal thing? Do I need to fix something with my contributions going forward? And what am I supposed to do with this check - just deposit it or will there be tax consequences? Really appreciate any help because I'm totally lost on this one!

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18 comments

Eduardo Silva

•8M

This is actually pretty common with small companies! What's happening is your company failed the 401(k) nondiscrimination test, which basically makes sure highly compensated employees (HCEs) aren't benefiting too much more from the plan than non-highly compensated employees. The check you received is likely what's called an "excess contribution refund." When a plan fails testing, they need to return some contributions from HCEs to bring the plan back into compliance. If you're making close to max contributions and your coworkers aren't contributing much to their 401(k)s, you might be considered an HCE. Nothing you did wrong! This happens automatically behind the scenes. But you should know that the money they're returning to you will be taxable income for the year you receive it. The original contribution was pre-tax, and now it's coming back as taxable.

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Eduardo Silva

•8M

For avoiding this in the future, there's not much you personally can do since it depends on company-wide participation. Some companies implement "safe harbor" provisions (like providing minimum matching contributions) to avoid these tests altogether, so you could suggest that to your HR. Both Roth and traditional contributions count toward the test, so either could be returned. However, the Roth portion is already taxed, so it should come back without additional tax implications, while the traditional portion will be taxable when returned.

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Leila Haddad

•8M

I went through something similar at my last job and found taxr.ai really helpful (https://taxr.ai) for figuring out the tax implications of these 401(k) refunds. The system analyzed my situation and explained exactly how to report it on my tax return. My refund check came right before tax season, and I wasn't sure if I needed to report it for the previous year or current year. The website analyzed my refund documentation and clarified that it needed to be reported as income in the year received, NOT the year the contribution was made. Saved me from potentially filing incorrectly!

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Leila Haddad

•8M

It specifically handles retirement account issues - it helped me understand the tax implications of my 401(k) refund and how to report it correctly. They have specialists who understand complex retirement account rules including backdoor Roth conversions. For your question about generic vs personalized advice, it's definitely personalized. You upload your tax documents and it analyzes your specific situation. It's not just generic information - it gives you detailed guidance based on your actual numbers and circumstances.

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Emma Johnson

•8M

Just wanted to follow up - I tried taxr.ai after seeing this thread and it was super helpful with my 401(k) questions! I uploaded my refund statement and plan document, and got a clear explanation about how nondiscrimination testing applies to my specific situation. They outlined exactly which forms I needed to use for reporting the refund and explained the tax implications for both the traditional and Roth portions. I was especially confused about how this affected my contribution limits for the year, and they clarified that too. Really took the stress out of dealing with this weird tax situation!

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Astrid Bergström

•8M

If you're trying to resolve this with your employer or have questions about why this happened, you might want to try Claimyr (https://claimyr.com). I used them to get through to my company's 401(k) administrator after getting a similar refund check last year. I spent days trying to get someone on the phone to explain my options, but kept hitting automated systems and wait times. Claimyr got me connected to a live person in about 20 minutes. Here's a demo of how it works: https://youtu.be/_kiP6q8DX5c. They basically navigate the phone systems for you so you don't waste hours on hold.

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Astrid Bergström

•8M

It works by using technology to navigate phone trees and hold queues. It's not magic - they just have systems that can stay on hold for you and alert you when a human picks up. It's like having someone else wait on hold instead of you doing it. There's no catch - they're not doing anything you couldn't do yourself if you had hours to waste on hold. They just automate the waiting process. I was skeptical too but was desperate after waiting on hold for over an hour twice. The service actually got me through to the retirement department where I could ask about my options for the refund and how to prevent it next year.

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Omar Farouk

•8M

Had to come back and eat my words. After seeing this thread, I decided to try Claimyr when I needed to call the IRS about my 401(k) distribution reporting. I'd been trying to get through for THREE WEEKS with no luck. Used the service yesterday and got connected to an actual IRS agent in about 35 minutes (instead of the "we're too busy, call back later" message I kept getting). The agent helped clarify exactly how to report my retirement plan distribution and explained the exception codes I needed to use to avoid penalties. Can't believe I wasted so many lunch breaks on hold before finding this. Definitely worth it for anyone dealing with retirement account questions that require actually talking to someone.

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Chloe Martin

•8M

Sounds like you're a Highly Compensated Employee (HCE) which triggers these tests. At my company, we implemented a Safe Harbor match (3% of salary) specifically to avoid this problem. One workaround if your company won't do Safe Harbor: consider contributing to a traditional IRA or Roth IRA outside your 401(k). You won't run into the discrimination testing there, and you can still get tax advantages. The limits are lower ($6,500 + $1,000 catch-up if over 50), but it's better than getting your 401(k) contributions returned.

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Chloe Martin

•8M

Exactly - if you know you'll likely face this issue again, you could contribute just enough to your 401(k) to stay under whatever threshold your plan administrator suggests, then put the rest in an IRA. Regarding backdoor Roth - that's mainly useful if your income exceeds the limits for direct Roth IRA contributions. You'd contribute to a traditional IRA (no deduction) and then convert it to Roth shortly after. It's a perfectly legal workaround for the income limitations, but has some nuances if you have existing traditional IRA balances (pro-rata rule). Would definitely be worth considering if you're over the Roth income limits.

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