ADP Excess Contributions

[Guest benefitsanalyst]

Our 401(k) plan converted to a new recordkeeper in November, 2001. As a result of our ADP testing, we have to refund some employees' pre-tax contributions to the plan. What is the best method to determine any earnings that may apply to the excess contributions since the new recordkeeper would not have that history?

[Archimage]

How do you not have the records? All you need to know is 1/1/2001 beginning balance, contributions, distributions, etc. and the earnings number will be the number that gets you to the ending balance from the prior provider. This information should be able to be retrieved from your client.

[Guest benefitsanalyst]

If I am refunding an employee $2,000 of their $8,000 of contributions, how will we determine what earnings apply to the $2,000 since these were deposited in the first 3 months of year?

[Archimage]

Okay, I think I understand your question a little better now. You can use any reasonable method as long as the method is not discriminatory. Here is the method that Relius (Quantech) uses:

"Total Refund Gain is the percentage of the total year-to-date gains for all relevant accounts equal to the ratio of the excess contributions to the total Beginning Balances plus Year-To-Date contributions for all relevant accounts. Relative accounts include ADP, ACP pre-tax match, and ACP post-tax match. Example: Total Refund Gain=1000*300/(15000+1200)=18.52"

[Blinky the 3-eyed Fish]

If the methodology is spelled out in the plan document, and it most likely is, you must use that methodology. If it's not, then a reasonable method may be used, one being the IRS default method.