Failed ADP

[Guest lindamichals]

I have read the many posts regarding the correct coding of 1099R in the case of a failed ADP where refunds are given.

I had been taught from the beginning of my pension training(over 8 years ago!) to code the refunds as code 8 even if the refunds were given prior to 2 1/2 months after the close of the plan year. The reasoning behind this was so that the HCE's affected would not have to go back and amend a tax return and it made sense to issue a 1099R in the year the refund was actually received. I was also taught that if a particular individual wanted to claim the refund as income in the year taxable they could do so without a 1099R, they would simply include that amount on their tax return. Code P was used if a failure was caught after the 2 1/2 months. This did not seem unreasonable to me since some clients fail to provide census data in a timely manner.

My problem is telling my clients they should hold off filing their tax return until after the ADP testing. Is it "illegal" to code 1099R's a code 8 even though the refund occurred within the first 2 1/2 months of the following year? I have convinced most of my clients to use prior year testing and most plans now pass, so this issue doesn't come up that often. I guess I'm just concerned that I've used code 8 incorrectly for several years. Which makes me wonder how accountants and tax preparers interpret code 8 and code P as no one has ever questioned this! Any advise would be most welcome. Thank you

Linda Michals

[pmacduff]

I've been in pensions for 13 years - In my Company, we find that the majority of our HCE employees due a refund have not even begun to think about their taxes when we process a refund before March 15th. We have always informed them that they must include the refund amount on their prior year return or amend if already filed. We also tell them that they will not receive a 1099-R until the next January (with a code "P"), but it is for reporting purposes only and can be placed with their prior year return (where the refund was declared). We use the code 8 for those refunds made after March 15th but before December 31st. I've always thought that it is a crazy way to do this...I agree that the refunds should be reported in the year distributed. This would make the most sense, but again, we are talking about the IRS/DOL ...speaking of making sense...how about the very nature of the ADP/ACP discrimination tests? To answer your question - I think according to the instructions, it is not correct to use a code "8" on a 1099-R for a refund given prior to March 15th. Just my humble opinion.....

[Guest mkimball]

I agree with MacDuff on the "P" if completed before 3/15, and an "8" if completed after 3/15, assuming calendar year plan of course.

[Guest Tinman42]

I agree as well. I worry that on audit, this could be an issue. The 1099-R states "taxable in current year" by use of Code 8, indicating plan completed refunds after 2 1/2 months. But - the client didn't pay excise tax on this excess. Obviously you could prove the check for the refund was cut within the 2 1/2 months, but I wouldn't think the client would appreciate the additional scrutiny!

I think what you've done is make things easier for the HCEs of your clients, when truly, does the IRS/DOL want it to be easy?? If they did, we sure wouldn't be doing all these fun tests!! Seriously, I've always thought this was one way to make the client (and the HCEs) see there needs to be a change in the current deferral percentages. If they have to go through the hassle of amending their tax returns or holding off until the last minute to file, maybe it will make them adjust their percentages....