Intentionally Failing ADP/ACP

[austin3515]

Small NONprofit has only one HCE, the CEO, who is 100% vested. Can they intentionally fail the ADP/ACP testing, knowing that he/she will be entitled to keep the excess matching contributions, which, had the test been passed, would have been foregone?

If the only HCE was the owner, their would simply be easier ways to get the money out of the company.

[chris]

Don't do a whole lot in the way of 401(k) testing, but how is it that the HCE will benefit from a failed ADP/ACP test? Won't failing the tests mean that corrective actions will need to be taken in order to maintain plan qualification? Also, nonprofit corporations don't have owners. Typically, they have members or no members and are generally run by a board of directors who elect officers......

[austin3515]

The second paragraph was to point that this would be N/A for a regular corporation as the additional money would just be bonussed out.

I'm aware that there are no owners in a nonprofit.

The benefit of failiing is to keep the additional match and be no worse off. The only hitch I've found so far is that the distributions need to take place before 2.5months after year end to avoid the excise tax for late distribution.

[R. Butler]

Isn't the HCE going to forfeit the matching contributions related to the matched deferrals that were refunded?

[austin3515]

No, if they're vested they get to keep it!

[R. Butler]

If thats true and you only 1 HCE you've got a nondiscrimination issue. You are effectively giving different match rates for the HCE than for the NHCE's.

See 1.401(a)(4)-4(e)(3)(iii)(G).

(G) The right to each rate of allocation of matching contributions

described in Sec. 1.401(m)-1(f)(12) (determining the rate using the

amount of matching, elective, and after-tax employee contributions

determined after any corrections under Secs. 1.401(k)-1(f)(1)(i),

1.401(m)-1(e)(1)(i), and 1.401(m)-2©, but also treating different

rates as existing if they are based on definitions of compensation or

other requirements or formulas that are not substantially the same);

[austin3515]

SORRY!!

If you fail the ADP, you must forfeit the match related to those deferrals. But if all you fail is the ACP, then you get to keep it. Is that more accurate?

My question is actually about a 403(b) plan, where they are exempt from the ADP anyway.

[Blinky the 3-eyed Fish]

I am not going to touch a 403(b) question, but Austin you did lead R. Butler astray with your answer to his question where he mentioned forfeiting associated match dollars on RETURNED deferrals.

R. Butler

Isn't the HCE going to forfeit the matching contributions related to the matched deferrals that were refunded?

Austin3515

No, if they're vested they get to keep it!

[R. Butler]

Its not hard to lead me astray. I really don't understand the initial question anymore.

Blinky, were you in the movie Finding Nemo?

[Blinky the 3-eyed Fish]

I auditioned, but they felt that my 3 eyes were a distraction and took away from the focus on other characters in the scenes with me. If offered to gouge out an eye and feed it to the hungry sharks, but ultimately, they were concerned with my health. I guess there is just no room for a radioactive mutant fish in Hollywood anymore.