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ADP vs. 402g failure - priority?


AlbanyConsultant

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In a controlled group where they handle payroll internally, an HCE under age 50 was allowed to defer from multiple companies and ended up with $29K deferred for 2018.  This plan also happens to fail the ADP test (partially because I had to include all those deferrals), and he will need to get an ADP Test refund that exceeds the amount of the 402g violation (yes, I'm only getting the information to do this today)... until I apply the earnings allocation, which is actually a loss for 2018, which brings it back to less than the 402g excess.

So what comes first here?  If I apply the net $10,000 ADP refund, then there's still a $500 402g issue.  What about taxation - 402g violations not corrected by 4/15/19 are double-taxed, so running them through as an ADP correction seems as if it would not make that clear.

Thanks for the last-minute advice...

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The ADP test includes 402(g) excesses for HCEs. So, you will calculate the amount of his refund including the entire 402(g) excess.

Any additional excess that remains in his account after the ADP refund is distributed is irrelevant, since 402(g) excess can not be corrected after 4/15.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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  • david rigby changed the title to ADP vs. 402g failure - priority?

If I understand the facts correctly he needs a $10,500 refund to pass ADP, $500 of which is 402(g) excess that should have been distributed by 4/15 but was not. If that correct?

If so I think you need to refund $10,500 as Excess Contribution to pass ADP since the 402(g) refund was not completed. Had the $500 been timely refunded by 4/15 you would only distribute the $10,000 since you don't "double refund" but since the refund wasn't made you need to remove the full amount to satisfy ADP.

As for the $500 402(g) excess deferral, he should have already picked that up on his 2018 tax return as income.

 

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I don't normally post anything on this board, but I disagree so strongly with the responses thus far that I felt compelled.

The OP indicates the excesses occurred within multiple plans under the same controlled group. So not only is this a 402(g) violation, but also a 401(a)(30) violation. The 401(a) violation should be corrected under EPCRS, see https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed for guidance.

The ADP test should then be run without considering the 401(a)(30) excesses, and if failing, addressed appropriately.

 

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The regulations are explicit that an HCE's excess contributions are included in the ADP test. See 1.401(k)-2(a)(4)(iii)

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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