"Evergreen" election to correct failing ADP / ACP test.

[Jean]

A client has made the following request to their recordkeeping service.

Client consistently fails the ADP test. They always elect to correct by distributing the excess contributions to the HCEs. They will never make a QNEC or any other employer contribution to the plan....so let's not discuss 401(k) safe harbor .

They want to provide a permanent instruction that if the ADP test fails, then the plan will distribute the excess contributions. In addition to this metohd, the plan document permits QNECs.

Comments?

[david rigby]

What a nuisance. Sounds like this plan sponsor is a candidate for a different plan design, such as discretionary profit-sharing, or perhaps amend the plan to limit contributions in such a manner to minimize the liklihood of failing the test.

P.S. is the plan top-heavy?

P.P.S. At what level (numerically), is the ADP test failing?

[Tom Poje]

maybe a nuisance, but in reality, the plan has allowed the HCEs (after refund) to defer the absolute max every year. And that sounds like what they want. I have had clients say that is what they want, that they don't care getting a refund as long as they max out.

[Jean]

Top heavy test is passing. The % difference is usually less than 1.5%

There will never be an employer contribution paid -- unless top heavy would require it -- so a discretionary PS is not of interest to them.

So...a permanent instruction to refund is ok?

[Brian Gallagher]

in our plan document, it allows qnec, refunds and recharacterization as corrections for the adp. however, the adoption agreement allows the plan to pick and chose which method(s) it wants.

i wouldn't see a problem here if the doc allows for both refunds and qnec's. i doubt there's anything that says one method has to be used instead of the other unless, like above, someone just checked qnec on the a.a. and not refunds.

[Brian Gallagher]

plus, the comapny can amend the plan anytime, too.