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401(a) early withdrawal now considered an overpayment!


Maria Danna

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In November 2018, while still employed full-time, I received an early distribution from my Prudential retirement plan that my (former) employer now claims was not available under the terms of the plan.  Subsequently, Prudential Retirement informed me that I "received an overpayment in the amount of $8614.18 that was not eligible for a rollover."  Prudential is requesting that I pay back this amount in full. 

I conacted Prudential to explain that this 2018 early withdrawaI was NOT a rollover to an IRA nor to any other retirement plan.

At the time of my initial withdrawal request in 2018, I explained to Prudential that I needed the money to pay down miscellanous household, credit card, and medical care expenses. This early distribution was processed without delay, and was ultimately reported on an 1099-R for tax year 2018. 

I retired in July 2019, and am now receiving monthly payments from that same Prudential retirement plan. However,  I'm extremely dismayed over this recent issue, and Prudential has been vague about my options or rights. Bottom line: I am unable to pay back this overpayment amount. 

I believe I'm the victim of an egregious clawback. What must I do?  What can I do? 

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Terminology can be important.  Your use of the funds (rollover, pay off debt, buy a boat, etc.) is not relevant.  What counts is why you got a payment.  Every plan defines how and when someone can be paid.  Most common are upon death, disability, retirement, or other severance of employment.  Your narrative seems to omit all four of those.

Did you receive a loan?  a hardship distribution? something else?  It's possible no "clawback" is needed, but better documentation of what/how your distribution was authorized.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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If the funds you received were part of your vested benefits in the plan, you don't have to do anything.  The self correction method for an overpayment includes trying to get the overpayment returned to the plan. They also have to notify you that the overpayment was not eligible for rollover.  If you don't repay the distribution (adjusted for lost income), the next step depends on whether or not the overpayment was part of your vested benefits. If the distributed funds were part of your vested benefits but were just distributed early, a repayment is not required. They will adjust your balance / benefits to reflect the amount you have been paid and move on.  They also have to change their procedures, but that's not your problem.

However, if you were paid an amount that was not part of your vested benefits, if they can't get you to repay it, the company or another party will have to repay the overpayment (adjusted for lost income) to the plan.   

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3 hours ago, Maria Danna said:

In November 2018, while still employed full-time, I received an early distribution from my Prudential retirement plan that my (former) employer now claims was not available under the terms of the plan.  Subsequently, Prudential Retirement informed me that I "received an overpayment in the amount of $8614.18 that was not eligible for a rollover."  Prudential is requesting that I pay back this amount in full. 

I conacted Prudential to explain that this 2018 early withdrawaI was NOT a rollover to an IRA nor to any other retirement plan.

At the time of my initial withdrawal request in 2018, I explained to Prudential that I needed the money to pay down miscellanous household, credit card, and medical care expenses. This early distribution was processed without delay, and was ultimately reported on an 1099-R for tax year 2018. 

I retired in July 2019, and am now receiving monthly payments from that same Prudential retirement plan. However,  I'm extremely dismayed over this recent issue, and Prudential has been vague about my options or rights. Bottom line: I am unable to pay back this overpayment amount. 

I believe I'm the victim of an egregious clawback. What must I do?  What can I do? 

Kevin C's answer is correct.  Bottom line: don't sweat it. If you wish, you can answer them now telling them you don't have the money, you paid taxes on it, and you are not going to be returning anything to the plan.  Not really your problem (this assumes it really was from your account).  You say you already told Prudential and explained it was not rolled over; did you hear from them again after that?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I have contacted Prudential twice by phone explaining:

1) the early withdrawal in 2018 was not a rollover.

2) I paid taxes on this early withdrawal for tax year 2018.

3) I'm unable to return the overpayment as Prudential requested.

4) Prudential advisors have created a case number for this matter, but thus far, nobody on staff has advised me further. 

5) I will not sign the form accepting a 250.00 "settlement payment" included with Prudential's notification letter which, to the best of my understanding, would release Prudential, the Plan, and my former employer's Retirement Board ("released parties") from  all claims related to the overpayment.

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Note to David: Prudential will not tell me how the original early withdrawal was termed, other than "early withdrawal." I asked about the terms "hardship" or "loan," but Prudential staff would not specify.  It definitely wasn't a rollover, but if Prudential coded it as such, it was their error. 

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23 hours ago, Maria Danna said:

I have contacted Prudential twice by phone explaining:

1) the early withdrawal in 2018 was not a rollover.

2) I paid taxes on this early withdrawal for tax year 2018.

3) I'm unable to return the overpayment as Prudential requested.

4) Prudential advisors have created a case number for this matter, but thus far, nobody on staff has advised me further. 

5) I will not sign the form accepting a 250.00 "settlement payment" included with Prudential's notification letter which, to the best of my understanding, would release Prudential, the Plan, and my former employer's Retirement Board ("released parties") from  all claims related to the overpayment.

Pretty much what I expected. Ignore everything else you get from them.  You will be fine. Sleep well!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 9 months later...

Hello All,

Like Maria, I also received this letter from Prudential.  It is surprising to know the mistakes are so common when it is with your money!!!

My situation is slightly different. I worked for the company for one year (2015 to 2016)  and rolled everything into a qualified rollover IRA plan.

The letter states that I received overpayments in the amount of $4,158.04 that was not eligible for a rollover.  Further, it says if I rolled it into an eligible retirement plan (including IRA), I MAY need to withdraw the overpayment plus applicable earnings from that plan and failure to do so can result in tax penalites.  Then it asks for me to please return it to the plan.

My questions/concerns are:

The letter says I MAY.  It sounds very non-committal and they are trying everything. 

I have no problem paying back money that is not mine.  However, how can they possibly expect anyone to pay back applicable earnings?  Whether I chose aggressive stocks or  a municipal bond is none of their business.  Also, how can they expect any participant to know what the earnings are on a subset of funds from 5 years ago?

I am wondering what most people do when they receive this letter.   How can Prudential continue to run plans if they continue to make these insane errors?

Okay.. Looking for some sound advice folks. ?

Thank you!!

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kateatthebeach, my best guess is that if you only worked there one year, you received some employer money (either match or profit sharing) that was not 100% vested and that should have been forfeited instead of being paid to you.  But that's just a guess, with a big company like that it is possible that the letter itself is a mistake.  I'd be inclined to ask for more details (again, with a big company like that you might get just as far by talking into a garbage can).  The downside of ignoring it all (or refusing to repay if they have a cogent argument for doing so) is that you might get a revised 1099-R showing the money was not eligible for rollover, in which case your tax return would have to be amended, and the money should come out of the IRA.  But maybe not; I have a feeling they are just going through the motions of asking and won't do anything.

Ed Snyder

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Just in general...

Over the years, I've seen a few (but very few) participants actually repay it after they get the letter. Mostly they say, "So sue me" and I've yet to see an Employer willing to bring suit for at most, a few hundred or thousand dollars ( why would they - legal costs exceed recovery amount, not to mention the hassle, time, and stress - although if amount was very large, it might be a different mindset) so the Employer makes the restorative contribution to the plan. The participant gets the revised 1099 - they have gotten free money; what do they care if the pay taxes on it? It is still free money in their pockets.

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Bird,

Thank you and I agree. That is my guess - they gave me the full vested amount before I was fully vested.

Belgarath, 

Thank you too and this is what I concluded from the non-committal language in the letter. Again, I am happy to pay back what is not mine but to ask me to trace back 5 years of applicable earnings is, in my opinion, completely unreasonable. 

I just do not want a tax headache down the line.

Thank you both!

Kate

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  • 4 weeks later...

Seems I have a similar situation.   Will I owe taxes on the excess distribution described below even if it was never my money?   Seems unfair.

1.     In April of 2017, I initiated a plan-to-plan rollover of 401K funds from a former employer,  which were being held at Prudential Retirements to the 401K plan of my current employer,  which are held at Merrill Lynch.

2.     The amount of funds transferred directly from Prudential to Merrill was $37,969.60

3.     I received confirmation from Prudential that the funds were directly transferred and validated that they were deposited in my 401K account at Merrill.

4.     I received a letter from Prudential dated July 31, 2020, that Vodafone made a determination that Vodafone improperly stated my vested interest in the account.   As a result, an overpayment of $7,391.14 was rolled over directly to Merrill.

5.     Vodafone has requested that Prudential request that I withdraw the funds and related earnings and return them to Prudential.

6.     Prudential has already produced revised 1099R forms to reflect the correct rollover eligible for tax deferral and the portion that is in excess.   One 1099R is coded "G" the other as "E".    

7. My tax preparation software tells me I have to pay taxes on the amount coded "E".    

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I responded to this in the other thread.  Generally not a good idea to post the same thing twice although this one has a bit more info.  I will paste your comments here into the other thread and suggest no more replies to this thread.

Ed Snyder

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