401(k) lump sum distribution limited because of highly compensated employees?
It's legal. In fact, they are required to do this, assuming you are in fact a HCE (highly compensated employee) to avoid getting in trouble with the IRS. I'm guessing they don't provide documentation for the same reason they don't explain to you explicitly what the income thresholds are for social security taxes, etc - that's a job for your personal accountant. Here's the definition of a HCE:  An individual who: Owned more than 5% of the interest in the business at any time during   the year or the preceding year, regardless of how much compensation   that person earned or received, or For the preceding year, received   compensation from the business of more than $115,000 (if the preceding   year is 2014; $120,000 if the preceding year is 2015, 2016 or 2017),   and, if the employer so chooses, was in the top 20% of employees when   ranked by compensation. There are rules the restrict distributions from plans like 401ks. For example, treasury reg 1.401a(4)-5(b)(3) says that a plan cannot make a distribution to a HCE if that payment reduces the asset value of the plan to below 110% of the value of the plan's current liabilities. So, after taking account all distributions to be made to HCEs and the asset value of the plan, everyone likely gets proportionally reduced so that they don't run afoul of this rule. There are workarounds for this. But, these are options that the plan administrators may take, not you. I suppose if you were still employed there and at a high enough level, a company accountant would have discussed these options with you. Note, there's a chance there's some other limitation on HCEs that I'm missing which applies to your specific situation. Your best bet, to understand, is simply ask. Your money is still there, you just can't get it all this year.
When you leave an employer, 401(k) loans are immediately due (or within 30 days or 60 days). So maybe they are waiting to see if you will pay off your loan. If you wanted to transfer the loan as well, you need to talk to your new 401(k) plan administrator to find out if this even possible. If they say No and you don't pay off the loan, it will count as a premature distribution from your old 401(k) plan and possibly be subject to excise tax in addition to income tax. "IRA is not always an option. There are income limits for IRA, that leave many employees (those with the higher salaries, but not exactly the ""riches"") out of it. Same for Roth IRA, though the MAGI limits are much higher. Also, the contribution limits on IRA are more than three times less than those on 401K (5K vs 16.5K). Per IRS Publication 590 (page 12) the income limit (AGI) goes away if the employer doesn't provide a 401(k) or similar plan (not if you don't participate, but if the employer doesn't provide). But deduction limits don't change, it's up to $5K (or 100% of the compensation, the lesser) even if you're not covered by the employers' pension plan. Employers are allowed to match the employees' 401K contributions, and this comes on top of the limits (i.e.: with the employers' matching, the employees can save more for their retirement and still have the tax benefits). That's the law. The companies offer the option of 401K because it allows employee retention (I would not work for a company without 401K), and it is part of the overall benefit package - it's an expense for the employer (including the matching). Why would the employer offer matching instead of a raise? Not all employers do. My current employer, for example, pays above average salaries, but doesn't offer 401K match. Some companies have very tight control over the 401K accounts, and until not so long ago were allowed to force employees to invest their retirement savings in the company (see the Enron affair). It is no longer an option, but by now 401K is a standard in some industries, and employers cannot allow themselves not to offer it (see my position above)." The matching funds are free money, so it is a very good idea to take that money off the table.  Look at it as free 100% return: you deposit $1000, your employer matches that $1000, you now have $2000 in your 401(k).  (Obviously, I'm keeping things simple.  Vesting schedules mean that the employer match isn't yours to keep immediately, but rather after some time; usually in chunks.) Beyond the employer match, you need to consider what is available for investment in a 401(k).  Typically, your options are more limited then in an IRA.  The cost of the 401(k) should be considered, as it isn't trivial for most.  (The specifics will of course vary, but in large IRA accounts are cheaper.) So, it's about the opportunity costs.  Up to the employer match, it doesn't matter as much that your investment choices are more limited in a 401(k), because you're getting 100% return just on the matching funds.  Once that is exhausted, you have more opportunity for returns, due to having more options available to you, by going with an account that provides more choices. The overall principle here is that you have to look at the whole picture.  This is similar to the notion that you should pay-down your high interest debt before investing, because from the perspective of investing the interest you're paying represent a loss, or negative return on investment, since money is going out of your accounts.  Specific to your question, you have to consider the various types of investment vehicles available to you.  It is not just about 401(k) and IRA accounts.  You may also consider a straight brokerage account, a savings account, CDs, etc.  The costs and returns that you can typically expect are your guides through the available choices. "I think there are several issues here. First, there's the contribution. As littleadv said, there is no excess contribution. Excess contribution is only if you exceed the contribution limit. The contribution limit for Traditional IRAs does not depend on how high your income goes or whether you have a 401(k). It's the deduction limit that may depend on those things. Not deducting it is perfectly legitimate, and is completely different than an ""excess contribution"", which has a penalty. Second, the withdrawal. You are allowed to withdraw contributions made during a year, plus any earnings from those contributions, before the tax filing deadline for the taxes of that year (which is April 15 of the following year, or even up to October 15 of the following year), and it will be treated as if the contribution never happened. No penalties. The earnings will be taxed as regular income (as if you put it in a bank account). That sounds like what you did. So the withdrawal was not an ""early withdrawal"", and the 1099-R should reflect that (what distribution code did they put?). Third, even if (and it does not sound like the case, but if) it doesn't qualify as a return of contributions before the tax due date as described above (maybe you withdrew it after October 15 of the following year), as littleadv mentioned, your contribution was a non-deductible contribution, and when withdrawing it, only the earnings portion (which after such a short time should only be a very small part of the distribution) would be subject to tax and penalty." This will be difficult to achieve.  It can be done, but it's very rare to have an agreement where your employer is willing to max out your contribution limit unless you are a partner in the business or a family relation. In this situation the extra employer money would probably come from a profit sharing contribution. If your employer increases your match, others are correct that your employer would have to increase the match for everyone. Not so with a profit sharing contribution. This is assuming 2 things though: Both of those are BIG if's, and I'd say 99% of the time it's not gonna happen for either of those two reasons. Your chances are better if you don't own >5% of the company, don't make over $120,000/year, and are related to you employer. Good luck! They don't care..   the people making those choices are judged on the short term basis; ie yearly bonus.  They make the choice to move it over, reap a massive bonus for a couple of years before the profit starts to crumble then they bail out.  I've seen it happen at no less than 5 of my clients. An alternate take on it might be that an employee who enjoys their work, their environment, and their co-workers has less incentive to look around, and may not even leave if they were offered 50% more. Perhaps efficiency measured in dollars isn't always a good measure. I agree that to take the money from the defined benefit plan you are saying that you can get a better return than the plan. You are taking all the risk if you take the lump sum. But there are two more risks that you are taking by keeping the money in the plan even though you are decades from retirement. Funding risk: companies and state/city/county governments have underfunded their pension programs due to budget pressure. In some cases they have skipped payments when the market was good, because they felt they were ahead of their obligations. They also delayed or skipped contributions when they had a budget shortfall, and wanted to not end the government/company fiscal year in the red. The risk is that they can get so far behind that they change their promises to current and former employees. This was one of the issues with the city of Detroit this year. Bankruptcy: even though their are guarantees regarding pension benefits, the Pension Benefit Guaranty Corporation does set a maximum benefit. If the company goes bankrupt or the plan is terminated  you might not get all the money you were expecting. While the chances of taking a haircut generally impacts people who have a long career, because they are entitled to a large benefit, it can impact people who don't expect it.