More than 54,000 401(k)s failed their nondiscrimination testing and were required to return $820 million to participants, according to an annual study released Tuesday by Judy Diamond Associates.
Judy Diamond studied 2013 plan data from 54,493 401(k) plans for the report.
Corrective distributions are issued when highly compensated participants are found to have contributed to a 401(k) plan at higher rates than other workers during the year. The IRS requires that highly compensated plan participates contribute at a similar rate to less well-compensated workers.
“The issuance of corrective distributions should serve as a red flag to financial advisors who are looking for opportunities to increase their 401(k) business,” Eric Ryles, managing director of ALM Financial Intelligence, said in a statement. “It means that the plan has highly compensated employees who were unable to save as much for their retirements with pretax income as they would like.”
Those workers will also have to pay more in income taxes than they may have planned on.