fiona1

A plan failed the ADP test for 1/1/06 to 12/31/06. After distributing the refund, it is found that part of the HCE's match must be forfeited. The plan sponser realized that this should have been done for the 2005 plan year, but wasn't. One of the HCE's who received an ADP refund for the 2005 plan year should have had some of his match forfeited. Since it has been over a year since the 2005 ADP refund was made, does anyone know the ramifications of not forfeiting the match would be? I don't see that there is a "deadline" to have to funds forfeited. And I don't see anything in the EPCRS about this. Anyone have any thoughts on what the plan sponser should do?

Thanks Tom...

That's exactly correct. It appears to me that it's allowable - based on the wording in 401(m)-2(a)(6)(iv), but that's just me. In the situation where a NHCE defers but quits and is not on the ACP test, our interpretation is that we would not shift the deferrals of the terminated NHCE.

Actually, we're not aggregating plans for coverage. Each plan is being tested separatley for coverage. In fact, I don't even think you can aggregate an ESOP and non-ESOP for coverage: Chapter 8 (Coverage) , Section VII of the EOB: ESOPs may be aggregated only if: (1) the proportion of qualifying employer securities to total plan assets is substantially the same for each ESOP, and (2) either (i) the qualifying employer securities held by all aggregated ESOPs are of the same class, or (ii) the ratios of each class held to all qualifying employer securities held is substantially the same for each ESOP. See Treas. Reg. §54.4975-11(e)(2). Chapter 11 (ADP/ACP) of the EOB: 1.a.1) ESOPs and non-ESOPs. Although ESOPs and non-ESOPs are generally not eligible for aggregation, the regulations published on December 29, 2004, permit aggregation of ESOPs and non-ESOPs solely for purposes of ADP and ACP testing. See the discussion in Part C of this Section XII. This rule is generally effective for plan years beginning on or after January 1, 2006. Thus, for pre-2006 plan years, an HCE’s elective deferrals, matching contributions, and employee contributions to an ESOP and a non-ESOP maintained by the same employer would not be aggregated, but for post-2005 plan years they would be aggregated. Since we're not aggregating for coverage, we have an ADP test for our 401(k) and an ACP test for our ESOP. We are not aggregating for ADP/ACP. So I'm just trying to clarify if I can shift in this situation.

I've been trying like crazy to find the answer to this. I found the following in 401(m)-2(a)(6): (iv) Aggregation must be permitted. The plan that provides for employee or matching contributions and the plan or plans to which the qualified nonelective contributions or elective contributions are made are plans that would be permitted to be aggregated under §1.401(m)-1(b)(4). If the plan year of the plan that provides for employee or matching contributions is changed to satisfy the requirement under §1.410(b)-7(d)(5) that aggregated plans have the same plan year, qualified nonelective contributions and elective contributions may be taken into account in the resulting short plan year only if such qualified nonelective and elective contributions could have been taken into account under an ADP test for a plan with that same short plan year. The Final 401(k) regulations now allow ESOP and non-ESOP plans to be aggregated for ADP/ACP testing. So if I have a 401(k) plan that passes the ADP test, I'm thinking it's okay to shift deferrals to my ESOP plan that has a 401(m) provision - even though it's a separate plan. I'm interpreting the code section above to say that you can use elective contributions in a 401(m) test as long as the plan they come from can be aggregated with the plan you're shifting them too. I'm assuming it's rare to shift deferrals from one plan to the ACP test of another plan. But based on what I found above, it looks to be permissible. I just hope it doesn't create any 401(a) issues.

Employer fails ADP test. Employer issues excess contribution refunds to HCE's. Refund checks have been cashed. The employer now wants to use the QNEC provision in their plan document to raise the NHCE average to pass the test. They use the current year testing method. Is this an option if refund checks have already been cashed? Can the HCE's send that money back to the plan?

An employer maintains an ESOP plan as well as a 401(k) plan. Deferrals are made to the 401(k) plan and the ADP test passes. However, the contributions made to the ESOP fail the ACP test. Both plans have the same plan year and they both use the current year testing method. Can deferrals to the 401(k) plan be shifted to the ACP portion of the ESOP plan? I read through the ERISA Outline book and it didn't describe the situation of 2 separate plans. And there doesn't seem to be any mention of this in the regulations. Any idea's if this is permissible?

If the IRS commented on this situation, then it's news to me. There was an ASPPA webcast in late January on 401K testing. At the end of the webcast they discussed some unanswered questions - one being what entry date to use in determining the otherwise excludable employees. This is one of the Q&A's from the webcast: Q: We use Relius for our ADP/ACP Testing. When the test is run to exclude employees who have not met the statutory eligibility requirements, the system will exclude any employee who is not age 21 and has not been employed 18 months. For example, a calendar year Plan has immediate entry for salary deferral contributions. An employee age 21 hired on May 31, 2005, worked 1000 hours in their first employment year. The employee terminates their employment on September 30, 2006. Since the employee failed to be employed 18 months, the system is placing the employee on the excludable list. Is this acceptable? If yes, we could have excludable employees in a Plan that requires age 21, 1 year of service with 2 entry dates. BK: As indicated in the session, IRS has not clearly defined which entry dates are acceptable (none, plan or statutory). You need to discuss this with your software provider to see if you are comfortable with their assumptions. So as of late January, we were still waiting for guidance on this issue. But if it has been addressed in the last month, I missed it. I know that we use the semi-annual date in the determination on the tests that we do.

Didn't you mean to say forfeiture instead of corrective distribution? Yep - I meant forfeiture. Thanks for the clarification.

We have clients who always match more than they're supposed to. Whether it's due to the compensation limit (like in this example), or due to the fact that they just don't follow the matching formula in the plan. In either situation, however, we treat the "surplus" match as a corrective distribution and we do NOT include the amount in the ACP test. I have looked through the regs and Sal's book like mad to find some verification that the surplus match would not be included in the ACP, but to no avail. However, I don't interpret Sal's book as saying you treat this just like a 402(g) violation and include in the ACP test for a HCE. Chapter 11, Section VI, Part C 1.a.6 and 1.b says that if there are deferrals that exceed a plan imposed limit or deferrals that exceed the 415 limit, then those deferrals are excluded from the ADP test. I would treat a surplus match in the same category and exclude them from the ACP. For deferrals over the plan imposed limit, Sal says "A reasonable interpretation of the law suggests that unauthorized deferrals (i.e., those which exceed the plan-imposed limit and are not catch-up contributions) generally should not be included in ADP testing, although the IRS has not provided formal guidance on this issue." For the original poster, I guess I would like to know why you interpret this the way you do.

The ERISA Outline book talks about the ability to recharacterize ADP refunds to after tax contributions. In order to do this, the plan document must allow Employee contributions. The EOB also says that the recharacterized after-tax money is subject to be tested in the ACP test. My question has to do with WHICH ACP test this money is tested in. For example, say a 1/1/06 to 12/31/06 ADP test fails. HC Employee A elects on 2/9/07 to recharacterize all of his $1000.00 ADP refund to an after-tax contribution. Is that $1000.00 EE contribution then retested in the 12/31/2006 ACP test? Or is it treated as a 2007 plan year contribution and tested in the 12/31/2007 ACP test?

Do these need to be refunded?

You actually have 12 months after the plan year end to correct a failed ADP/ACP test. So, assuming the 1/1/06 to 12/31/06 ADP test failed, you have until 12/31/07 to issue the refunds. Now, assuming the gross amount of the refunds are $100 or more, then.. ...if refunded by 3/15/07 then they are taxable in 2006. ...if refunded after 3/15/07 then they are taxable in 2007 and the plan sponsor incurs a 10% excise tax. Most plan sponsors will issue the refunds within 2 1/2 months to avoid the 10% excise tax. Keep in mind that the 10% excise tax is imposed on the plan sponsor and NOT the participant and only required if the refunds are not distributed within 2 1/2 months (3/15/07 in this case).

Good question - The following is from the EOB which may answer your question: Chapter 11: 401(k) and 401(m) Testing - Section IX (QNECs and “shifting” of contributions): Part C (“Shifting” elective deferrals to ACP test) The plan may not apply the recharacterization rule first, and then determine how it wants to shift elective deferrals to produce different testing results. All testing must be completed, including the shifting of elective deferrals if desired, before determining whether there are any remaining excess contributions that would be distributable under IRC §401(k)(8)© but are eligible for recharacterization as catch-up contributions. This is confirmed in the preamble to the final IRC §414(v) regulations. See 68 F.R. 40511 (July 8, 2003).

I did a search to see if this question has been posed before, but couldn't find anything. A participant has low compensation and defers most of it. The plan is top-heavy and the TH minimum contribution would put the participant over the 415 limit. Is the TH contribution reduced so it doesn't exceed the 415 limit, or is the TH minimum paid and the participant would then have a refund of deferrals for exceeding the 415 limit?

Thanks Tom.

So if you fail an ADP or ACP test, you have 12 months to make a correction. If you don't make a correction within the 12 month prescribed correction period - then you have an operational failure on your hand. You can use the Self Correction Program in the EPCRS - and one of the options is the One-to-One Correction Method, which involves the refunds being made and a QNEC in the same amount allocated to the NHCE's. If a plan allows for forfeitures to offset employer contributions, can they use the forfeitures to fund the QNEC? Or, is this considered a corrective QNEC and would forfeitures not be allowed to fund this? Thanks for any insight.

Thanks Trekker

Does anyone have any idea how you test a plan that is part of a controlled group for part of a year? For example, Company X, Company Y and Company Z are part of a controlled group. They each have a 401(k) plan and they are tested together for 1/1/04 to 12/31/04. But on 8/1/05, Company X is purchased by an unrelated employer - so they are no longer part of the controlled group on 8/1/05. For 2005 testing, would you: a) Test X, Y and Z together from 1/1/05 to 8/1/05. Test Y and Z together from 8/1/05 to 12/31/05. Then test X separately from 8/1/05 to 12/31/05? b) Text X, Y and Z together from 1/1/05 to 12/31/05 - but only testing the comp and contribs of X from 1/1/05 to 8/1/05. Then test X separately from 8/1/05 to 12/31/05? c) other options? Thanks for any help.

Q: 401(k) plan fails ADP test for 1/1/05 to 12/31/05 plan year. 4 Highly Compensated employees are due refunds below: Employee 1: $4,000.00 Employee 2: $3,000.00 Employee 3: $2,000.00 Employee 4: $1,000.00 Employee 1 and 3 are still active. Employee 2 terminated on 1/31/06 and took a cash distribution. Employee 4 terminated on 7/14/06 and took a cash distribution as well. Employee's 2 and 4 have ZERO funds in the plan. Since the March 15th, 2006 deadline is passed, the plan sponser must pay a 10% excise tax. Will this tax be: A) 10% of $10,000. 10% will apply to all refunds, despite any distributions. B) 10% of $6,000. The 10% will not apply to EE 2 and 4 since they have already taken a distribution. C) 10% of $7,000. The 10% will not apply to EE 2 since his distribution was before 3/15/06. But it will apply to EE 4 since his distribution was after 3/15/06.

Nice. Thanks for the link.

If a small company was looking for some software to create 5500 and 5300 forms, is Relius from Sungard the most popular choice? Can anyone give me the names of some other software packages that will produce 5500 and 5300 forms? Is there anyone who uses something other than Relius?

That would be determined by the plan document. There can be a plan provision that says an employee must be active at plan year end in order to receive the QNEC. It is also common to have an hours provision where an employee must work a certian number of hours.

Here is an odd situation - but was hoping for some opinions.... Plan sponsor forgot to do their 2001 ADP/ACP testing. They are currently doing it now. When the plan document was signed for GUST, the prior year testing method was chosen. The GUST document was signed in 2002. In doing the 2001 ADP/ACP testing, are they limited to using the prior year method (since that's what the plan document indicates)? Or, can they use the current year method since 2001 was during the GUST remedial period? I suppose this is an interpretation issue - as I can see it both ways. Any opinions?

Thanks for the reply. I'm able to answer 14a - 14d okay if I need to, but I'm not sure if I should answer "Yes" or "No" to 14. How do I know if my plan needs a determination for a design-based safe harbor? Does the fact that the plan covers only bargaining employees factor in this at all? Part of me thinks that since it covers only bargaining employees, then I don't need a determination for a design-based safe harbor. But I can't find anything to verify that.