Letter Notifying 401(k) Plan Participant of Corrective Distribution For Failed Nondiscrimination Test

This legal template pertains to a letter notifying a participant in a 401(k) plan about a corrective distribution that needs to be made as a result of a failed nondiscrimination test under US law.

A 401(k) plan is a retirement savings vehicle offered by an employer to its employees. In order to maintain compliance with US tax laws, these plans must undergo annual nondiscrimination testing. This testing ensures that the contributions made by highly compensated employees (HCEs) do not disproportionately benefit them over non-highly compensated employees (NHCEs).

However, if the plan fails this test and is determined to be discriminatory, corrective actions must be taken to rectify the imbalance. One such corrective measure is a corrective distribution, which involves returning excess contributions made by HCEs from their 401(k) accounts.

This legal template assists employers or plan administrators in drafting a formal letter to notify a participant who is subject to a corrective distribution. The letter would outline the specific details of the failed nondiscrimination test, the resulting corrective distribution requirement, and any necessary steps or procedures that the participant needs to take to comply with legal requirements.

In addition, the letter may also include information about the potential tax implications for the participant, as corrective distributions may be subject to different tax treatments than regular distributions. It may further provide guidance on how to report the corrective distribution on their tax returns.

By utilizing this legal template, employers or plan administrators can effectively communicate the need for corrective action to participants in a clear, concise, and legally compliant manner, ensuring transparency and compliance with US laws regulating 401(k) plans.