401(k) Term, Testing and 401(a)(17) proration?

[Lou S.]

Calendar year 401(k) plan.

If the plan terminates mid year, say 7/31 with the intention of getting assets distributed by 12/31 how is the ADP testing done in the final year?

Is the comp limit 7/12th of the 401(a)(17) limit?

What happens if the final distribution of assest is say 10/31? Would that change the proration to 10/12th?

Does this mean you can't do the ADP test before earlier of 12/31 or all asstes distributed?

If participants rolls to and IRA and later it is determined the plan failed ADP I know the procedures to fix but they can be something of a pain for both TPA and partcipant so we'd rather do refunds before hand if there are any but how can you caculate a proper ADP if you're not sure what the denominator is going to be for some HCEs?

Assume they are not running a short PYE for the year of termination.

Does this make sense?

I searched for some other threads on this but didn't find anything on point back to 2009 but maybe I missed it.

[Tom Poje]

the regs simply say if you already distributed the balance to an HCE before distribution of excess, the corrective distribution is deemed to have been made. there is nothing in there that says "But what if he rolled everything into an IRA?"

1.401(k)-2(b)(2)(v)
Distribution. Within 12 months after the close of the plan year in which the
excess contribution arose, the plan must distribute to each HCE the excess contributions apportioned to such HCE under paragraph (b)(2)(iii) of this section and the allocable income. Except as otherwise provided in this paragraph (b)(2)(v) and paragraph (b)(4)(i) of this section, a distribution of excess contributions must be in addition to any other distributions made during the year and must be designated as a corrective distribution by the employer. In the event of a complete termination of the plan during the plan year in which an excess contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination. If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required.

as for testing comp, I'd think you'd use the same logic as applies to top heavy as explained at the
2010 ASPPA Conference Q and A #3

Q: DC plan is top heavy and has a plan year ending 12/31. The plan terminates
on September 15, 2010. Normally, TH minimums are provided only if the
employee is employed on the last day of the plan year. (Assume that there
are salary deferrals during the year so that, if a top heavy minimum is
required, it needs to be made.)

A Of course, if there is no employer contribution, there would not be an obligation to provide top heavy minimum contribution. But, if there were contributions to keys during the year, including elective deferrals, there is a top heavy minimum based on compensation and employment through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else 9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes