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If a 401(k) plan fails ADP, distributes the excess contributions as required to correct the failure, and in the process HCEs forfeit matches attributable to the distributed excess contributions, as they must, can the employer turn around and provide taxable (W-2 compensation) bonuses to the HCEs with the match forfeitures, for example exactly in the amounts of the individual match forfeitures, without violating the anticonditioning rule of Treas. reg. sec. 1.401(k)-1(e)(6)? Arguably this is OK, because the bonuses are not conditioned on the employee's making or not making the elective deferrals, but rather are conditioned only on some of the elective deferrals failing ADP, since in order for the bonuses to be paid, in the amounts they are paid, both (a) the HCE must have made the elective deferral, and (b) a portion of deferral must be distributed to correct an ADP failure. On the other hand, the employee would not receive the bonus if he or she had not made the deferral to begin with, albeit that the employee did not know at the time he or she made the deferral whether a portion would be returned to him or her as excess and result in a cash bonus rather than a 401(k) match. The reg says that the conditioning can't be "direct or indirect" (emphasis supplied), so maybe what I'm describing is "indirect" conditioning. On the other hand, what is being proposed here is very similar to what you can do with matching in a nonqualified spillover plan matched to your 401(k) plan, although the PLRs blessing those seem to be based on part on the language in 1.401(k)-1(e)(6)(iii) specifically dealing with nonqualified plans, so maybe they are distinguishable on that basis, and of course they are only PLRs anyway.

I looked every where for this so sorry if this is a repeat. The employer was part of a PEO, Multiple Employer Plan and has spun off into their own plan 401(k) plan. Is the new plan considered a successor plan, and therefore cannot use the use the 3% Prior Year average available for the first plan year? Or is the new plan considered a new plan?

The S corp owner has received a W-2 compensation payment, additionally he has received 1099 misc. from the same corporation. Compensation in the plan document is defined as W-2 wages or earned income for self-employed individuals. Can we use the 1099 misc. line 3 “other income” as income in addition to the W-2 wages?

We have a 401(k) plan sponsored by a Limited Partnership (Hotel) where one of the 5%+ owners is a working manager taking draws but no W-2 wages. Would she be included in ADP testing? Her daughter also works for the hotel but does receive W-2 wages (she owns 2.5%). Definition of compensation per the plan doc is W-2 (no exclusions).

We have an HCE (>5% owner) who is now in RMD payout status, i.e. 70 1/2 and said HCE asked if we can count the ADP refunds already paid in 2017 to offset (reduce) the RMD amount (total distribution) now payable. Is this permissible? And any IRS produced documentation would be much appreciated. Thanks!

Hey Y'all! Quick question for my fellow practitioners. I am studying the DC-2 book to eventually get my QKA and I came across a sentence saying that corrective distributions (ADP & ACP corrections) are subject to 10% withholding unless the participant completes a Form W-4P. I was wondering who all was practicing this? I don't recall ever seeing a corrective distribution with any withholding applied in my short tenure. Thanks in advance!!

Greetings, I am in the process of preparing a VCP for the below described errors. Where I'm at a loss (despite extensive review of the forums) is (a) Can the correction for the use of the incorrect match be limited to just those participants making deferral (those with "account balances") by using a QMAC instead of a QNEC correction; and (b) If a prohibited transaction occurred as a result of the incorrect match % and the loss earnings, thus requiring a VFCP. FAILURES: 1. Failure to correctly apply the Plan's matching contribution provisions to employees during 2012 and 2013 (Plan Sponsor applied lower matching % to all new employees, despite the Plan language limiting this to only acquired Company A employees) 2. Corrections necessary to pass the non-discrimination tests for 2013 and 2014 due to the three tier matching contribution formula (Plan Sponsor used the wrong matching % in performing tests) Proposed Correction under VCP A. For those participants that received the smaller incorrect match AND that had "account balances" (i.e., limiting the correction only to those participants making elective deferrals). a QMAC (as opposed to a QNEC) could be made under VCP. [i know there's a strong argument this correction should go to all eligible participants - even those not deferring - but such a correction would be astronomically higher] B. Since the incorrect employer match was used, resulting in lost earnings, I believe this would be a prohibited transaction (outstanding match % became plan assets when PS filed tax return) and thus I would propose a VFCP be filed with the DOL (meaning no filing of Form 5330 Return of Excise Taxes). However, looking at the VFCP Application, there is no box to check for "missed employer matching contributions/earnings" Any insight would be most appreciated. Thank you...

Can anyone direct me to where i could find if corrective refunds for ADP are performed on a FIFO or LIFO basis? I searched the forum and found a thread on the subject, but it referred to Treasury Regulation 1.401(k)-(1)(f)(4)(ii), but that seems to be regarding special rules for direct rollovers of Roth contributions. I've been looking in chapter 11 of the EOB, but i can't find anything. Thanks in advance!

Client failed testing. Refunds issued and cashed. Discovered bad data was used. Tests rerun and client still failed but refund required for HCEs was less than what was issued? As to issue of refund, can they self correct?

Corp. ABC sponsors a 401(k) Plan. Corp. ABC has two 50/50 shareholders who liquidate the business 6/30/14 and go their seperate ways. One shareholder takes 7 of 11 participants to a new corp. which does not sponsor a new plan. This group is treated as terminating from ABC corp. and is paid out in 2015. The second shareholder takes the other 4 participants to a new corp XYZ which adopts the existing ABC corp Plan as the new Plan Sposnor. Since ABC and XYZ are not a controlled group or ASG, how must the prior year ADP test be completed? I have tested the ABC employees separately for the first half of the year and they pass based on the prior year NHCE ADP. If I test the XYZ employees seperately for the second half of the year, what NHCE ratio do I use?

Plan allows for 1 year, age 21 with dual entry dates 1/1 and 7/1. Sponsor, in February, acquires a related business with 100+ employees in an assets purchase. Plan is amended to credit service for vesting and eligibility with acquired company. For this year's ADP testing (the year of acquisition) may we test the group of acquired employees (with appropriate service) separately as otherwise excludible (or some other classification) or must we test them all together or, alternatively, do we have a choice? To me, the regs seems ambiguous. These employees were able to defer during the acquisition year, but only had imputed service for eligibility purposes. Thank you.

Plan has "Fixed" Contribution equal to 5.7% of compensation and 5.7% of excess Compensation - 100% vested Plan Also has "Match" Contribution equal to 100% of elective contribution up to 5% of compensation - 2/20 Vesting Plan Also has "Minimum" Contribution equal to 3% of compensation minus the fixed contribution for the year. If fixed exceeds 3%, then no minimum made - 100% vested Plan uses Prior Year Testing Plan Document does not speak to a designated QNEC for correction of a failed ADP test Question: Should the plan fail the ADP test, can the Minimum contribution be re-characterized as a QNEC to pass the ADP test?

Under EPCRS, plans may not use permissive disaggregation when correcting a failure to timely correct a failed ADP/ACP test utilizing either the QNEC method or the One-to-One correction method. However, it is not clear if this means the coverage testing for the plan must also be re-run without using permissive disaggregation, or if EPCRS is only focused on the determination of which NHCEs share in the QNEC or the one-to-one allocation. In other words, if the coverage test was run using permissive disaggregation, is the correction sufficient even if you do not re-run coverage so long as the ADP/ACP test is re-run without using permissive disaggregation and the corrective contributions are made on that basis? Or must coverage also be run without permissive disaggregation?

Would either participant be included the adp test? 1 - An [eligible] participant is now terminated, but listed with no compensation (or hours). 2 - An [eligible] participant is "still on the books" and only works as needed, so they have no real term date, but is listed with no compensation (or hours).

For the December 31, 2012 plan year, a plan uses current year testing to run the ADP test. Test fails. The sponsor elects to deposit a QNEC to non-HCE's before the end of 2013. The sponsor also amends the plan to prior year testing before the end of 2013. Should the corrective QNEC deposit be included in the 2012 non-HCE deferral average for the 2013 ADP test when using prior year testing? Thanks.