402g Failure Question

[Guest KD40]

Scenario:

EE fails 402g and is a HCE, but not age 50. Failure amount of the 402g is $2041.40. We run ADP testing, we test his deferrals of $13041.40 in the ADP, as we are suppose to keep that amount in the test for a HCE. The plan fails ADP testing, and he is the only failure required. The ADP failure amount is $1733.82.

Question:

When we refund his 402g failure of $2041.40, wouldn't this satisfy the amount of the ADP failure as well. Thus, the only amount he is going to receive would be the $2041.40?

[Tom Poje]

you are correct, after the refund of excess deferrals there will be no more refund needed

see 1.401k-1(f)(5)

now suppose you were operating under the old rules and this guy has comp of 200,000 and someone else (HCE) had 10% deferral.

If I recall correctly, the 10% guy would have had to get a refund under the old leveling rules!

[2muchstress]

Tom, what if the sitution was reversed, and the ADP refund was greater than the 402g refund.

For example:

Young HCE defers $11,500 for calander and plan year ending 12/31/02. 402g Excess is $500.

For ADP, we use the 11,500 and the calculate return of excess contributions is $2000.

Does the ADP refund correct the 402g refund - or are both refunds calculated independently?

Thanks in advance.

[Tom Poje]

It doesn't really matter what order you do things, or what order your thinking process applies

as long as the 1099-r reflects a 402g refund (since the W-2 will indicate the overage.)