401(k) Cross Test Plan

[Guest Thornton]

I discovered something today that I previously hadn't been aware of. I have a new cross tested 401(k) plan using the 3% safe harbor. This is a new plan effective 1/1/02, and we did a preliminary study a year ago, using three HCE's (owners). Everything tested out, maxing the three doctors at $40,000.

Today we get the census, and the spouses of the three HCE's were paid $14,000 and deferred $11,000! Of course, we were never told ahead of time! We still pass the nondiscriminatory classification test, but fail the average benefits test big time since the combined EBR's for the spouses are so high (126 in one case).

If the HCE's want to max out, the only viable option I see is reducing the deferrals of the spouses and refunding the excess. Question: Is there authority to refund the excess? There is no ADP failure here. Any ideas, besides not cross-testing this year? Thanks.

[Tom Poje]

I know of no authority for refunding excess. There is no provision under a(4) to refund $ for a failure.

sounds like they pay the price (no cross testing contribution) for not telling you about spouses.

[AndyH]

The most economical correction might be to provide sufficient $$$ to get all the rate groups to 70% to avoid the ABPT.

[Guest Thornton]

Thanks, Andy. We were able to get all rate groups to 70% quite economically. The client is very happy!