401k problem and settlement

[squeegee]

Calling lawyers, benefits people -

I've been going through an issue with my employer about a problem with my 401k contributions. The short summary is that they "forgot" to do any contributions to my 401k for two years, including 50% matching, and instead the money (minus matching) ended up in my paycheck and I was taxed on it. After six months of going back and forth, they've admitted fault and are willing to make a settlement to me in form of a lump sum to my 401k to make the problem go away. One problem I have is knowing what a 'fair' settlement would be.

During the time in question, I had set my paycheck withholding high enough that the total amount that would have been in my 401k would have been the maximum legal contribution of $16500, times 2 years or $33000. Add 50% matching @ $8250 * 2 years to total $49500. On top of that is whatever my investments would have gained or lost, of which I have no idea.

On the other side of the ledger: I got that money as regular pay, so in theory I still have it minus taxes. It seems to me I am owed the taxes payed plus all the matching contributions, plus investment gain, if any. But that 'fair' amount seems a little fuzzy -- even if they stuff that settlement amount into my 401k, tax deferred, I'm still out any investment gain that the remaining money (the taxes) would make over the next 15 years before I would be whole.

How are things like this settled fairly? What should I be owed? I can't be the first person this has happened to, so there must be some sort of standard procedure, if only because 401k's are highly regulated. Are there online resources that detail existing cases and how they were settled?

[Mosier]

Originally Posted by squeegee

On the other side of the ledger: I got that money as regular pay, so in theory I still have it minus taxes. It seems to me I am owed the taxes payed plus all the matching contributions, plus investment gain, if any. But that 'fair' amount seems a little fuzzy -- even if they stuff that settlement amount into my 401k, tax deferred, I'm still out any investment gain that the remaining money (the taxes) would make over the next 15 years before I would be whole.

I followed you up to this point. The math should be simple. Figure out the "gain" that a hypothetical correctly applied contribution + match would have made, figure out the taxes you lost due to the error, and add the two figures together. You've already done all the math for what should have been contributed and the tax you paid in error, and the financial institution managing your 401k almost certainly has history for your account gain/loss rate during that time.

[squeegee]

Originally Posted by Mosier

I followed you up to this point. The math should be simple. Figure out the "gain" that a hypothetical correctly applied contribution + match would have made, figure out the taxes you lost due to the error, and add the two figures together. You've already done all the math for what should have been contributed and the tax you paid in error, and the financial institution managing your 401k almost certainly has history for your account gain/loss rate during that time.

There are two starting points. A = the amount that should have been in the account up to now. B = how much I will be compensated. B < A because taxes were paid so I would (in this scenario) only get A-taxes=B. Over the next 15 years, A might earn more investment return because A > B.

[wellanuff]

Sorry that I can't answer your specific questions, but I want to emphasize that the last two years have been extremely good for the stock market when taken as a whole, despite what you hear about Europe, etc. If you are not already aware of this, the S&P 500 closed at 1049.33 on August 20, 2010. Today it closed at 1418.13, which is a 35% gain over two years. So don't let them handwave away or downplay missed investment gains if you have any say in the matter.

That doesn't mean you should get 35% on the whole lump sum, because you would not have been investing all of it two years ago, but it should be an easy matter to calculate the gain for 24, 18, 12, and 6 months for the four missed contributions. Frankly, although I haven't checked the exact figures, the last twelve months and the last six months also probably provided some nifty returns.

Good luck, and hopefully someone will be along with information that more directly answers your questions.

[Omar Little]

And then there's also the mitigating factor that it took you two years to figure out that there was a mistake. Surely, you don't expect them to make you whole for that entire period?

[Labrador Deceiver]

Originally Posted by Omar Little

And then there's also the mitigating factor that it took you two years to figure out that there was a mistake. Surely, you don't expect them to make you whole for that entire period?

I'm a 401k sales specialist and financial advisor. If this happened to one of my clients' employees, they'd better damn well expect to be made whole. I have no earthly idea why you think the OP shouldn't.

[Sateryn76]

Originally Posted by Labrador Deceiver

I'm a 401k sales specialist and financial advisor. If this happened to one of my clients' employees, they'd better damn well expect to be made whole. I have no earthly idea why you think the OP shouldn't.

Does the OP have no responsibility to be checking for quarterly statements and such?

[Telemark]

Originally Posted by Sateryn76

Does the OP have no responsibility to be checking for quarterly statements and such?

None of that mitigates the mistake made by the company, so I would say "No, the OP doesn't have a responsibility to do anything." It is prudent, but not required.

[Dead Cat]

Originally Posted by Telemark

None of that mitigates the mistake made by the company, so I would say "No, the OP doesn't have a responsibility to do anything." It is prudent, but not required.

Agreed. I work in the industry (albeit in the UK) and generally speaking, unless the client is actively at fault they can expect to be fully compensated in this situation. Having said that, we did have one recently where we only agreed to partially reimburse the investment loss, as the client had received a letter specifically pointing out the basis on which we were proceeding (which turned out to be wrong due to an earlier error) and had not done anything about it. These situations are rarely 100% black or white, though the benefit of doubt always goes to the client for regulatory and business (goodwill) reasons.

ETA: Mosier has already given the correct answer to the OP. The investment company should be able to do this calculation fairly easily on request. It is in their interests to do so as well, as it means they will be getting more money. It's not an uncommon scenario.

[Musicat]

Originally Posted by Labrador Deceiver

I'm a 401k sales specialist and financial advisor. If this happened to one of my clients' employees, they'd better damn well expect to be made whole. I have no earthly idea why you think the OP shouldn't.

I should think the company should owe MORE than just what they neglected to pay. Anyone who "forgets" to pay taxes is slapped with interest and a penalty. Why should this company be any different?

[Labrador Deceiver]

Originally Posted by Musicat

I should think the company should owe MORE than just what they neglected to pay. Anyone who "forgets" to pay taxes is slapped with interest and a penalty. Why should this company be any different?

The company should make him whole, which would include any gains/losses the accounts have realized over the past 2 years. However, the OP had the benefit of the increased income over that same period, which would need to be taken into account.

[Sailboat]

Originally Posted by Labrador Deceiver

I'm a 401k sales specialist and financial advisor. If this happened to one of my clients' employees, they'd better damn well expect to be made whole. I have no earthly idea why you think the OP shouldn't.

It's Omar Little.

[Omar Little]

Originally Posted by Labrador Deceiver

I'm a 401k sales specialist and financial advisor. If this happened to one of my clients' employees, they'd better damn well expect to be made whole. I have no earthly idea why you think the OP shouldn't.

Because typically, 401k contributions are an annual election you make with your employer. Clearly the OP didn't check for TWO YEARS, whether this was being done properly. I would argue that the second year of non contribution is the responsibility of the OP in this case.

ETA: What if he had never checked and 25 years passed, would you still expect the Company to make him whole for 25 years?

[Telemark]

Originally Posted by Omar Little

ETA: What if he had never checked and 25 years passed, would you still expect the Company to make him whole for 25 years?

Yup. If the employee set things up correctly and the company messed up, it's their responsibility no matter what subsequent checking the employee did or didn't perform.

[SmellMyWort]

I think you'd be owed the tax and you're employer's contribution. Keep in mind that some plans cap their match at a certain % of your salary, so you may not get the full 50% if that applies to you. As for gain/loss, I assume your enrollment paperwork would have specified the fund(s) you wanted, so as others have stated, it should be hard for the plan administrator to figure it out.

[hajario]

Originally Posted by Omar Little

Because typically, 401k contributions are an annual election you make with your employer. Clearly the OP didn't check for TWO YEARS, whether this was being done properly. I would argue that the second year of non contribution is the responsibility of the OP in this case.

ETA: What if he had never checked and 25 years passed, would you still expect the Company to make him whole for 25 years?

It says in the OP that the company admitted fault.

[Omar Little]

The OP's company is going to run into bit of a problem I believe, if under the regs. they are going to treat the correction as a company contribution to his account, there is a limit of 25% of the employees pre-tax compensation that can be contributed annually. So if his total compensation is $150,000, then the company will be limited to being only able to contribute $37,500.

[squeegee]

Originally Posted by Omar Little

The OP's company is going to run into bit of a problem I believe, if under the regs. they are going to treat the correction as a company contribution to his account, there is a limit of 25% of the employees pre-tax compensation that can be contributed annually. So if his total compensation is $150,000, then the company will be limited to being only able to contribute $37,500.

My understanding is that they would file amended paperwork for the two problem years with the feds, so the limit would fall across each of those two years.