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Yeah, love these legislative acronyms, but still waiting for the Working Toward the Future Act - although a colleague said he thinks most could be called that.

When this issue is left as an open administrative function, we typically ask the contact at the firm to have the affected HCE call us for discussion. In that discussion we outline options and expected impact, directing that person call their tax advisor for counsel and then get back to us with a decision. Of course, a deadline is set for response, and a follow-up email is sent immediately after the call, covering what was discussed. If this approach is not allowed by time, or the person fails to get back to us, we discuss the issue with the Plan Administrator and make a decision on default application. Prorata is probably the safest way in the absence of a decision from the participant. Another method is in proportion to the contribution division of that person. We also have plans that are expected to fail send out a "warning notice" to the HCE, asking for them to define their preference.

The qualification failure is a simple fix. The plan made an in-service distribution that should not have been permitted. You can self-correct under EPCRS by having the participant repay the amount to the plan. See Rev. Proc 2018-52 6.06(4). Correction principles also require that the underlying problem which caused the failure be addressed. In this case that would mean that the client stop performing their own ADP tests and leave it to the qualified professional going forward.

It's all good. Tax treatment, deductions all are the same from your seat. Relax.

It is done in lieu of refunds. If the calculations support HCE A receiving an ADP refund of $4,000, but they have not used up their full catch-up limit for the year, the $4,000 is reclasssified as catch-up instead of being distributed to HCE A. What should NOT be done is reclassifying catch to all the HCEs at the beginning of the test. just because HCE B only deferred $5,000 and is over age 50, and 100% of their deferral would fit within the catch-up limit does NOT mean it should proactively be classified as catch-up to give them an ADP of 0% to help the test at the beginning. The reclassification to catch-up only only occurs in lieu of refunds. The ADP test is performed AFTER catch-ups are reclassified due to the 402(g) limit. So the scenario only applies to people who are age 50 or older and deferred less than the 402(g) limit + mac catch-up. Hope that helps.