Removing Fidelity Excess Contributions: The Simple Guide


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Do you have a Fidelity 401k and an Emparion defined benefit plan (or cash balance plan)? Maybe you have a Fidelity SEP and also one of our defined benefit plans?

Well be careful. There are many restrictions and limitations that you may not be aware of when you combine retirement plans.

In this post, we will take a look at the rules when combining retirement plans and provide you with simple instructions to remove those excess Fidelity contributions. Let’s dive in.

Background

Stand alone solo 401k plans are subject to IRS contribution limits. For 2021, the total 401k contribution limit per participant is $58,000 or $64,500 for individuals age 50 and over. These numbers represent the employee deferral and a profit sharing of up to 25% of your W2 (20% for a schedule C).

However, when the two plans are combined, the profit sharing contribution is limited to just 6% of your wage. So the overall 401k contribution is limited when you combine plans.

Let’s look at an example. Joe is 54 and has a consulting business. He pays himself a W2 of $200,000. If Joe only has a solo 401k, he can make a maximum contribution of $64,500 for 2021.

But if Joe combines a defined benefit plan with his 401k plan, his 401K contribution will be limited to his elective deferral $26,000 and an employer contribution of $12,000 (6% of his W2). When the plans are combined, his overall 401k contribution is reduced by $26,500 ($64,500 minus $26,000 minus $12,000). Of course, he more than makes up for the reduced 401k contributions with a large defined benefit plan contribution of $200,000 plus.

But what if Joe accidentally contributed $64,500 into his 401k? He must then remove the excess $26,000 contribution.

How to Remove Fidelity Excess Contributions

Removing this excess contribution is usually not as difficult as you might think. The IRS allows you to correct plan errors. These corrections should be made prior to your tax filing date. However, the sooner the better.

If your 401K plan account is with Fidelity, we’ll first need to determine your account type. There are two account types.

  • Investment-Only (Non-Prototype) Retirement Account
  • Small business 401(k) or Profit-Sharing Keogh

You can login into your Fidelity online account or review an investment statement to determine your account name which will mention one of the above types. You should also have the following account details that will be needed to complete the distribution process:

Plan and Trust Information:

  • Account Number
  • Name of Trustee (typically the business owner)
  • Name of the Employer Plan (usually part of the account name)

If you have a small business 401(k) or Profit-Sharing Keogh, Fidelity only requires a letter of instruction. You can find our template letter here.

If you have an Investment-Only (Non-Prototype) Retirement Account you will use the following steps to process your corrective distribution:

  1. Download the following form: One-Time Withdrawal – Investment-Only (Non-Prototype) Retirement Account https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/non-prototype-retirement-account-withdrawal.pdf
  2. Input your plan and trustee information collected from your online profile or account statement
  3. Distribution Instructions: Use section “Cash Distributions from a Brokerage Investment Only Retirement account”
  4. If you have funds in cash available for distribution, use this section

Usually option 2 “ONLY the following amount…” to provide the amount to be distributed

Use the section “All Other types of Distributions” if your distribution will involve the sale of mutual fund shares or other securities.

Use options 3 “Only the following securities and amounts”

Name the security name or symbol and provide number share or specific dollar amount

Distribution Method:

For the simplest distribution process select option 3e. “Check payable to the employer’s retirement plan, mailed to the address of record” all other options will require a Medallion signature guarantee.

Trustee must sign and date

Submit the entire form to Fidelity Investments using the following addresses:

Regular mail

Attn: Retirement Distributions
Fidelity Investments
PO Box 770001
Cincinnati, OH 45277-0035

Overnight mail

Attn: Retirement Distributions

Fidelity Investments

100 Crosby Parkway KC1B

Covington, KY 41015

Paul Sundin

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