Calculation of ADP/ACP corrective distributions...

[Guest RONNIE WASEL]

Tough question:

We are working with a plan that has not filed 5500's or had any testing completed since 1997. We have already filed tentative 5500's under DFVC and are slowly getting them current.

Question:

Each past year 1997, 1998, 1999, 2000 the HCE's fail the ADP/ACP pretty bad resulting in big corrective distributions. Large enough that if each year's were taken individually, they would exceed the amount in some of the HCE's accounts as of the current date.

Is it safe to say that you would adjust for cumulative losses, or how would you go about distributing a total amount that is more than they actually have?

Anyone have any other insight?

Thanks,

Ronnie Wasel

[Mike Preston]

Since this involves corrections that are more than two years stale, how are you avoiding EPCRS? Under EPCRS, I don't think you can correct by merely distributing, can you?

[Guest RONNIE WASEL]

Good point. Does that mean they will probably need to make QNECs and QMACs or will it depend on what the IRS says?

[R. Butler]

See Rev. Proc. 2002-47, Appendix A .03. The permitted correction method is QNC's.

[jaemmons]

Under Rev Proc 2002-47, you would correct under the one-to-one method, whereby for every $ refunded the same would be contributed as a QNEC to the affected participants for each plan year.

I would review Appendix B , Section 2,under Rev Proc 2002-47. I agree with Mike. A formal application under VCP, since this would constitute an egregious error so VCO is not available, must be made. Good Luck.

[Guest APozek]

Appendix B, Section 2.01(1)(B) provides the refunds/forfeitures (and thus the one-to-one QNEC) should be adjusted for earnings through the date of correction. This should help alleviate your issue of current HCE account balances being less than refunds for any one plan year.

That said, the egregiousness (if that is even a word) may make this an entirely different ball game.