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Greetings, Draggon, and welcome. You asked:

Did my new employer follow the 401k rules correctly? In the case of company buyouts, can the new employer limit your (total) contribution to their 401k to 25% of the salary they paid you while you worked for them? Or is the 25% limit based on an ANNUAL limit, no matter how many plans you may have been in?

You are receiving the corrective distribution based on your compensation with the new employer and the overall limits prescribed by law on that employer's 401(k) plan. Your old compensation, plan and contributions have nothing to do with that refund. From what you described, the corrective distribution you received is totally appropriate. In fact, had you not been given that refund, then your present 401(k) plan could have been disqualified by the IRS, thus forcing an early distribution, taxation and penalty on all plan participants. That wouldn't be a very pretty thing to watch happen.

Secondly, assuming that they did this correctly, how are my taxes affected? The amount on this check was included as tax-deferred income on last year's 1040. Now I have the cash, so is this considered income to be reported for 2002? Do I get a tax credit for the 10% Federal Tax that was witheld on this check?

Fortunately, this was a 415 corrective distribution. That means the amount of the refund you received must be reported as income in the year you received it (i.e., in 2002). That income, along with the amount withheld against potential income taxes, should be reflected in the W-2 form showing your normal wages, bonuses, etc., that you will receive from your employer for the year. The withholdings amount will apply toward your final income tax bill for the year.

Hope that helps.

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