TL;DR
A diligent saver maxed out his 401k, only to get a refund check because his company’s plan flunked an IRS fairness test—a cautionary tale about hidden risks in retirement planning.
Story
John, a diligent saver, maxed out his 401k contributions, dreaming of a comfortable retirement. Then, a $4,000 check arrived—not a bonus, but a refund. The IRS, citing anti-discrimination laws, deemed his contributions too high. John’s company’s 401k plan failed the nondiscrimination test.
Like a rigged game, this test assesses if highly-compensated employees (HCEs) benefit disproportionately from 401k plans. If HCE contributions outweigh those of lower-paid workers, refunds ensue, impacting company matches and creating taxable income. It’s like 2008—the system seems fair until the fine print hits.
‣ Nondiscrimination Test: An IRS rule ensuring 401k plans benefit all employees, not just the wealthy.
John’s story reveals a hidden risk in retirement planning. Companies prioritizing short-term savings over employee well-being, avoiding safe harbor provisions. This echoes Enron—cutting corners for short-term gains, risking long-term collapse.
‣ Safe Harbor Provision: A 401k plan design avoiding nondiscrimination testing by meeting specific contribution requirements.
John’s lost match and unexpected tax burden highlight the importance of scrutinizing your employer’s 401k plan. Don’t just assume it’s a safe haven—look for red flags like limited employer contributions and low participation among lower-paid colleagues. These can be warning signs of future refund surprises.
Advice
Don’t assume your company’s 401k is a safe bet. Investigate their plan, looking for red flags like low participation among lower-paid employees, and prioritize safe harbor plans.