Overpayment due to vesting error

I have an issue that just arose, I was notified by my previous employer plan sponsor that I was overpaid when I left my 401k.  I was overpaid roughly $6000 due to an error by the plan administrator back in 2016.  I have since rolled those funds into my own personal IRA and now Vanguard is requesting I give those funds back.  I dont feel that I am obligated to return those funds as I was not the one who made the mistake and in most lines of work you are held accountable for mistakes and not allowed to pass them off to someone else.  Additionally I dont feel I should have to pull those funds from my IRA which would be an early distribution (additional tax consequence) and I would then need to amend my tax return from 2016 which is time and resources spent when that would not be necessary had this error not occurred.  I am curious if anyone has insight into what my rights and options are?  I can obviously not respond but dont want to have a law suit on my hands and dont want to have this issue come up in 20 years when they claim some crazy thing like I now owe them $50,000 because of inflation and interest.

Some thoughts from a non attorney....You don't need to amend the tax return for an incorrect rollover amount.  It has no bearing on taxation. Having funds in your IRA that are not "qualified" could jeopardize the tax status of the rest of the money in your IRA.  If they file a suit and can prove your were overpaid, you will have to return the overpayment.  If you hire an attorney, do so to ensure that the vesting they are telling you is correct is in fact correct and that there is no other reason why your vesting should have been calculated differently.  Fighting the suit just because you don't think you should have to pay the money back would be a waste of $$. People ignore this kind of thing at thier own peril.  If the amount is small enough, they may not see an advantage to filing a suit and trying to recover the funds.  For $6000, i would not be surprised if they pursue this.

3 hours ago, njkotz28 said:

I have an issue that just arose, I was notified by my previous employer plan sponsor that I was overpaid when I left my 401k.  I was overpaid roughly $6000 due to an error by the plan administrator back in 2016.  I have since rolled those funds into my own personal IRA and now Vanguard is requesting I give those funds back.  I dont feel that I am obligated to return those funds as I was not the one who made the mistake and in most lines of work you are held accountable for mistakes and not allowed to pass them off to someone else.  Additionally I dont feel I should have to pull those funds from my IRA which would be an early distribution (additional tax consequence) and I would then need to amend my tax return from 2016 which is time and resources spent when that would not be necessary had this error not occurred.  I am curious if anyone has insight into what my rights and options are?  I can obviously not respond but dont want to have a law suit on my hands and dont want to have this issue come up in 20 years when they claim some crazy thing like I now owe them $50,000 because of inflation and interest.

We will assume that they are correct about the over payment and you understand that you WERE overpaid.  Therefore, you are in possession of money that belongs to other people and, yes, it should be returned. There should be no tax issue since you rolled it over and you can return it by rolling it back to the plan which is a non-taxable event.  You do not need to explain why you are rolling it back and I would suggest you don't try to explain since the IRS custodian is likely only to screw it up.  And yes, if this was my client, we would take you to small claims court.  It is no different than if your bank deposited someone else's check into your account.  It isn't your money, and just about any court is going to make you return it; there is no justification for your "undeserved enrichment".  It doesn't matter what you "feel" about your obligation; the court will see it differently and you should just comply.

Our paperwork has a section that indicates if you are overpaid, you will pay it back.  I agree with the above, it is not funds you were entitled to so you must return them. 

OK thank you for all the responses.  I suppose I will return the funds and put this thing to bed.

But I think you DO need to be careful about how you return it.  You don't want the IRA custodian reporting it as a taxable event, and they will almost certainly insist on reporting it somehow.  If all parties will agree to call it a rollover, then that will get you where you want to go, although it's not technically correct.

1 hour ago, njkotz28 said:

I suppose I will return the funds and put this thing to bed.

Larry's assumption may be valid.  However, it would be prudent to make sure you get adequate documentation of their error.  First.

4 hours ago, Bird said:

But I think you DO need to be careful about how you return it.  You don't want the IRA custodian reporting it as a taxable event, and they will almost certainly insist on reporting it somehow.  If all parties will agree to call it a rollover, then that will get you where you want to go, although it's not technically correct.

What you need to do is fill out the appropriate form with your current IRA custodian, electing a direct transfer to a qualified plan and give them all the appropriate/requested info.  That will (almost!) guarantee that the reporting is correctly handled.  DON'T try to explain to them the WHY of this transaction; they don't care, and there is always a chance that such additional involvement will only screw it all up for you.

njkotz28, IRC sec. 408(d)(5)(B) was written by Congress just for you! (And others similarly situated). It protects you from any tax or penalties on the clawed back amount, assuming you return it.

3 hours ago, Luke Bailey said:

njkotz28, IRC sec. 408(d)(5)(B) was written by Congress just for you! (And others similarly situated). It protects you from any tax or penalties on the clawed back amount, assuming you return it.

Agreed, but I think the better route is a direct transfer from the IRA custodian to the prior employer plan.  That will avoid having to deal with the IRS at all.  It transferred to the IRA tax free; it an "rollover" back to a plan tax free too.