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Failure to distribute failed ADP test dollars timely


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401(k) Plan has failed the ADP test for 2015, 2016, 2017 and 2018.

 
Refunds were processed each year, but after the March 15th deadline each year. They are not an EACA plan so we can't use the June 30 deadline either. The amounts are insignificant in terms of the total contributions.
 
They failed to file a form 5330 each year to pay the excise tax. What is the right fix here?
 
The plan is to file a form 5330 for each year realizing they are late and that penalties and interest will apply What about the "stacking" of the penalty on the 5330. For example, say they returned $25k for 2015. The 10% penalty would be $2,500.00. The instructions under the prohibited transaction rules say "If the prohibited transaction is not corrected within the taxable period, an additional tax equal to 100% of the amount involved will be imposed under section 4975(b)"
 
The instructions only have that bolded section under the prohibited transaction rules, not the Section H portion about ADP test refunds. I am hoping it isn't $2,500 for 2015, then $25k each year they didn't file.
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Failure to correct a failed ADP test by distributing excess contributions before the end of the following plan year can be corrected by using the "one-to-one" method described in Rev. Proc. 2019-19. Basically, you distribute the excess contributions (adjusted for earnings) and make a QNEC to the NHCEs equal to the amount of the excess contributions - but please read the actual rev proc for details.

There is no second-tier tax imposed by sec. 4979. There is a penalty for late filing the Form 5330 and paying the excise tax however. See the instructions to the 5330 for details. The penalty can be waived for reasonable cause.

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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