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Question #30 06/4/98


Guest Jhagan
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Guest Jhagan

What is the excess contribution amount to be refunded to Participant D to satisfy the ADP test for 12/31/97?

ADP for HCE = 4.5

Max ADP which allows to pass test is 3.7

Part, Deferrals, Comp

A, 4500, 150000

B, 7000, 140000

C, 3000, 100000

D, 6300, 90000

Answer is 1,240 Explanation??

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Guest DSD

The easiest way to solve this is to determine the ADRs first (contrib/comp) for each employee.

A. .03

B. .05

C. .03

D. .07

Employee B and D need to be reduced. First reduce D to B's ADR of .05. The total ADR is .16 - divide by 4 and you still are not passing .16/4 = .04.

B and D need to be reduced below .05 but not as far as A or C. Since you know it will pass with an ADP of 3.7, determine the total ADRs for the group by multiplying 3.7% by 4 = 14.8% or .148. This is the maximum that the four employees can add up to.

If you subtract .148 from .16 (the total of the ADRs after reducing D to .05) the difference is .012. The total ADRs need to be reduced by this amount. Since B and D need to be reduced equally, divide .012 in half - .006. Reduce B .05 and D .05 by .006 which equals .044.

Now add the new ADRs and make sure their ADP equals 3.7%.

A. .03

B. .044

C. .03

D. .044

Total is .148/4 = .037 or 3.7%

Calculate the total to be refunded:

B - 7,000 - (.044 X 140,000) = 840

D - 6,300 - (.044 x 90,000) = 2340

Total 3180

Refund to HCE with the highest deferrals first:

B - 7,000 reduced to next highest HCE which is D - reduce to 6,300

Total refunds - 3180

Less B's refund - 700

Remaining - 2480

Reduce B and D equally until next HCE deferral amount is reached or total refunds are depleted:

B - 1240

D - 1240

Answer is 1240.

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