Prior Year ADP testing and plan imposed 15% limit exceeded by NHCE

[Guest crosseyedtester]

When a NHCE exceeds the 15% imposed plan limit and the ADP test is run the following year, is the NHCE ADP calculated using the original contribution before return of the excess over 15%, or is it rerun to determine the ADP when the correct amount is input?

[Mike Preston]

It depends. If the intent is to follow the document and return the excess, I would use the lower amount in the test. If the intent is to use the IRS correction procedure in order to allow the excess amount to stay in the plan, I would use the actual amount.

[Blinky the 3-eyed Fish]

Mike can you clarify for me what IRS correction procedure will allow the excess to remain in the plan? I am not aware of that availability in such a situation.

[Mike Preston]

Don't have time tolook it up today, but if ADP test fails, and ER contributions needed to "prop up" the test are not made on a timely basis, you can file with the IRS to "correct" by making those contributions you would have made had you made them on time. Note that this is more costly than the "1 for 1" correction that allows the monies to be redunded late.

[Blinky the 3-eyed Fish]

Mike, I am not following. It's a NHCE that exceeded a plan imposed limit.

I have always understood that exceeding a plan imposed limit is similar to a 402(g) violation in that the excess is distributed with earnings. I am unaware of a correction method that would allow this "excess" to stay in the plan.

That's is why when going back to the original question, I would again liken it to a 402(g) violation and run the testing using a rate of 15% for the particular NHCE.

[Mike Preston]

OK, lost sight of it being an NHCE.

Retroactive document correction to allow NHCE benefit in excess of original plan document provision, but less than legal maximums is always an option under EPCRS. I think the phrase is "conforming the plan to its operation."