ADP/ACP Test

[Guest CCarter]

Hi-

If a plan fails ADP and money needs to be returned to the (one and only) HCE but there are also matching contributions - do I have to refund the related match as well? THX

[Tom Poje]

good question, it doesn't hurt to verify stuff.

you did not indicate that the ACP test failed, so I will assume it passed.

In that case refund of deferrals causes related match money to be forfeited (not refunded).

since it is a forfeiture, anyone entitled to receive forfeitures can receive, including the HCE.

it ceases to be a match, its almosy like an extra ps contrib to the plan.

(If plan had failed ACP test, then you are allowed to refund ACP first, then refund ADP, so sometimes the match $ goes back to the HCE)

[Guest Boilerburm]

Be careful in your calculation, though, to make sure that the "related match" is tied to your excess. For example, you contributed 8%, but were only matched on the first 6%. If your ADP failure only brings you down to 6%, you don't have any forfeiture of matching contributions, since the match you received still meets the formula applied to all participants.

[jaemmons]

The matching amounts that are associated with returned deferral amounts are forfeited. The reasoning is that if you allow the HCE to keep those matching $'s, they would be benefiting at a higher rate than any NHCE, and as such you would have a 401(a)(4) problem with respect to the matching formula.

This is done even before you run any ACP testing.

[MWeddell]

Note that the regulations require that the plan "provide" for this forfeiture, although there's no fix if the plan document doesn't contain that provision.

[jaemmons]

MWeddell,

I would think that you would be able to self-correct this, even if the plan document doesn't contain the forfeiture provision. If an HCE is receiving a match that is different than what is contained within the plan document, in addition to a higher allocation rate, I would think you'd have an operational problem since the plan is not operating according to plan document terms.

[MWeddell]

You may be able to self-correct it under the Self Correction Program portion of the EPCRS, but there is no provision in the regulation for self correcting it. The IRS discussion of this issue is in the preamble to the 1994 revision of the 401(k) regulations (or at least that's my recollection).