Can I roll over 401(k) contributions that were made prematurely (by mistake)?

Question

The company I work for told me yesterday that they need to refund my 2010 401(k) contributions because they recently discovered during an audit that they enrolled me into their plan prematurely since I hadn't yet met their requirement of 1000 hours of service with a year of employment. They said they will be issuing a 1099.

Do you think I can roll these 2010 contributions out of their plan into another account so I don't have to pay taxes? I used to work for another company that had a 401(k) and when I left that company I rolled over the funds to a Fidelity account that was set up.

Answer 1

No. Your deposits should not have been accepted in the first place. No legit rollover opportunity exists.

Related - Can excess 401(k) contributions returned with 1099-R be rolled over to a Traditional IRA?

Answer 2

You weren't eligible for a 401K in 2010, but you were eligible for an individual IRA. If you had known by April 18th that you had this extra money, you could have deposited (not rolled over) the money, up to the maximum ($5,000 or so, I think), into an IRA account You could do that because you didn't participate (legally) in an employer retirement program.

But you didn't learn until early May, so you missed that deadline. I doubt that the IRS has any provisions for waiving that April 18th deadline, but I could be wrong: see the IRS publications.

In any case, to answer the question directly - no, you can't roll over the money you're getting back, because it was mistakenly in the 401K plan. It will now become part of your 2011 income, and so you'll owe taxes on it when you file your tax return for the tax year 2011, in early 2012.