Failing ACP test and refunding contributions

[Guest buyertoday]

If you fail the ACP test and have to refund after-tax contributions, must you also refund earnings on contributions? What if there is a loss?

[Mike Preston]

What does the document say? There are two periods that plans separately define for purposes of this calculation: earnings credited during the plan year and earnings during the gap period from the end of the plan year until the date the monies are paid. Most plans provide for pro-rata earnings during the plan year and that gap period earnings are determined based on the 10% method. By no means do all plans provide these rules, though, so you need to look in the plan document.

If there was a loss, you reduce the amount refunded.

[Guest buyertoday]

The plan doesn't accept after tax contribs. Just looking at the possibility of amending the plan to allow after tax contribs, but it looks like the ACP test could fail. So, does that mean that it is up to the Plan to decide how to refund contribs (including earnings or not)? No gov't regs saying you have to refund earnings? FYI - plan currently states that w/ regard to excess pre-tax contribs, earnings (or losses) are also refunded.

Thanks.

[Mike Preston]

Yes, there are regulations that require refunds to be credited with interest on the period from date of contribution to end of the plan year. Earnings credit during the gap period are not mandatory. The calculation of earnings during the plan year must be "reasonable." With that said, yes, it is up to the plan to decide how to implement the provisions, as long as those provisions are consistent with the regulations.