Why your 401(k) keeps giving your money back.

Every spring, owners of small firms across Florida — dental and medical practices, law and accounting firms, specialized trade businesses — open a letter from their 401(k) provider and find money coming back out of their retirement plan. This page explains why it happens, why it keeps happening, and the design change that ends it.

The letter that makes no sense

It arrives between the tax documents and the payroll close. The plan, it says, “failed nondiscrimination testing,” and a “corrective distribution” is on its way: a few thousand dollars — sometimes twenty thousand — of your own savings, mailed back to you. The money leaves the plan, lands in your taxable income, and undoes exactly the thing you set the plan up to do.

The letter is polite, dense, and assures you this is all quite common. For many practice owners it is the only mail their plan ever generates. Nothing in it explains why it happened — or that it didn't have to. Your CPA sees the 1099 land the following January and shrugs: it's handled correctly, as far as it goes. Correct accounting for a wrong design.

The test nobody ran

Behind the letter is one rule. A 401(k) must prove, every year, that the owners and highly paid staff aren't saving wildly more than everyone else. Call it what it is: a fairness test. Roughly, take what your staff save as a percentage of pay, average it, add about two points — that is the most you, the owner, are allowed to put in.

In a small practice, staff participation is usually low. So your ceiling collapses. You contribute to your own limit through the year; the plan runs the test after year-end; the excess comes back to you. Taxed.

Here is the part the letter never says: the test can be projected before the year starts, and a plan can be designed to pass it — or to remove it entirely. Most plans were never designed at all. The test was something that happened to them every spring, not something anyone engineered for.

Why your provider calls it normal

Ask your provider and you'll hear that refunds are normal. That's true — for undesigned plans. Most small-practice 401(k)s are checkbox plans: switched on inside a payroll bundle in an afternoon, one template among thousands. Nobody ran the numbers on your census, projected the test, or asked what the owners actually wanted the plan to do.

When a plan is installed rather than designed, failing is normal. The provider isn't lying to you. They're describing their own product.

The switch that ends it

The fix is old, boring, and reliable. A safe-harbor design commits the practice to a defined contribution to staff — the standard version is 3% of pay — and in exchange, the fairness test is removed entirely. Your contributions are secured no matter what your team saves.

The catch is timing. For an existing plan, the switch generally has to be in place by December 1 to change how the current year ends. And for newer plans, federal startup credits can cover a large share of the cost in the first years — for some practices, the fix is better than free in year one.

How to check your own plan in five minutes

Your plan's annual return — Form 5500 — is a public record. The Department of Labor publishes every filing in its EFAST2 public search, free, no login. Search your practice's name and open the most recent filing.

Look for the compliance question that asks whether corrective distributions were made. A dollar amount on that line means the plan failed its test and mailed money back that year. The same line filled in for the third year running is not bad luck — it's the design. That's the public record we read before we ever contact a practice, and the same one we'll read for you.

While the filing is open, look at one more thing: who signed it, and what they were paid to. If nobody is listed as designing or testing the plan — only recordkeeping — you're looking at the reason the refunds keep coming.

Or skip the search

Send us nothing but your plan name. We'll read the public filing and tell you what it says — including if it says you're fine.

Short answers to the questions this letter raises

Figures from public Form 5500 filings. Not legal or tax advice.