Return of match on excess contributions

[Guest Taxman]

Can someone provide me with the exact Regulatory cite that says when an ADP failure is corrected by refunded excess deferrals that the match attributable to those deferrals is also forfeited? What if there is immediate vesting for matching contributions, do the Regs. trump this nonforfeitability and allow them to be forfeited?

All help is appreciated.

[g8r]

It's from Regulation 1.401(m)-1. The relevant paragraph is below (I obtained this through benefitslink source materials, but it's impossible to figure out the specific subsection).

The issue comes up where you refund deferrals and there is a related match on those deferrals. The resulting rate of match is a problem under 401(a)(4). You then have two options - either forfeit the related match (even if it is fully vested), or increase the rate of match for NHCEs so that it is no longer discriminatory.

After this section there is an example that goes through the process. First, refund the deferrals, then correct any ACP test failure (there you can refund a match to the extent vested), and then deal with the related match problem.

4) Coordination with section 401(a)(4). A matching contribution is

taken into account under section 401(a)(4) even if it is distributed,

unless the distributed contribution is an excess aggregate contribution. However, the method of distributing excess aggregate contributions provided in the plan must satisfy the requirements of section 401(a)(4). This requires that after

correction each level of matching contributions be currently and

effectively available to a group of employees that satisfies section

410(b). See Sec. 1.401(a)(4)-4(e)(3)(iii)(G). Thus, a plan that provides

the same rate of matching contributions to all employees will not meet

the requirements of section 401(a)(4) if employee contributions are

distributed under this paragraph (e) to highly compensated employees to

the extent needed to meet the requirements of section 401(m)(2), while

matching contributions attributable to employee contributions remain

allocated to the highly compensated employees' accounts. See

Sec. 1.411(a)-4(b)(7) for a rule that allows forfeiture of these

matching contributions to avoid a violation of section 401(a)(4). See

also Sec. 1.401(a)(4)-11(g)(3)(vii)(B) regarding the use of additional

allocations to the accounts of nonhighly compensated employees for the

purpose of correcting a discriminatory rate of matching contributions. A

method of distributing excess aggregate contributions will not be

considered discriminatory solely because, in accordance with the terms

of the plan, unmatched employee contributions that exceed the highest

rate at which employee contributions are matched are distributed before

matched employee contributions, or matching contributions are

distributed (or forfeited) prior to employee contributions. See Example

6 in paragraph (e)(6) of this section.

[Guest Taxman]

It's from Regulation 1.401(m)-1. The relevant paragraph is below (I obtained this through benefitslink source materials, but it's impossible to figure out the specific subsection).

The issue comes up where you refund deferrals and there is a related match on those deferrals. The resulting rate of match is a problem under 401(a)(4). You then have two options - either forfeit the related match (even if it is fully vested), or increase the rate of match for NHCEs so that it is no longer discriminatory.

After this section there is an example that goes through the process. First, refund the deferrals, then correct any ACP test failure (there you can refund a match to the extent vested), and then deal with the related match problem.

4) Coordination with section 401(a)(4). A matching contribution is

taken into account under section 401(a)(4) even if it is distributed,

unless the distributed contribution is an excess aggregate contribution. However, the method of distributing excess aggregate contributions provided in the plan must satisfy the requirements of section 401(a)(4). This requires that after

correction each level of matching contributions be currently and

effectively available to a group of employees that satisfies section

410(b). See Sec. 1.401(a)(4)-4(e)(3)(iii)(G). Thus, a plan that provides

the same rate of matching contributions to all employees will not meet

the requirements of section 401(a)(4) if employee contributions are

distributed under this paragraph (e) to highly compensated employees to

the extent needed to meet the requirements of section 401(m)(2), while

matching contributions attributable to employee contributions remain

allocated to the highly compensated employees' accounts. See

Sec. 1.411(a)-4(b)(7) for a rule that allows forfeiture of these

matching contributions to avoid a violation of section 401(a)(4). See

also Sec. 1.401(a)(4)-11(g)(3)(vii)(B) regarding the use of additional

allocations to the accounts of nonhighly compensated employees for the

purpose of correcting a discriminatory rate of matching contributions. A

method of distributing excess aggregate contributions will not be

considered discriminatory solely because, in accordance with the terms

of the plan, unmatched employee contributions that exceed the highest

rate at which employee contributions are matched are distributed before

matched employee contributions, or matching contributions are

distributed (or forfeited) prior to employee contributions. See Example

6 in paragraph (e)(6) of this section.

g8r

Thanks for the response. One more question. Is the prohibition just against discriminatory matches for HCE's? For example, let's say I decided in a plan to match Jim and Jerry 1% and Bill and Bob 100%, and I pass every test because Bill and Bob are NHCE's. Isn't there a uniform match requirement or am I just dreaming?

[Tom Poje]

Rate of Match is a BRF issue, which compares HCEs to NHCEs, so you can always favor NHCEs if you desire (if your document is written as such)

If plan fails ACP test as well, you could distribute the match first. Excess aggregate contributions are not considered when testing the rate of match. There is nothing I know of that requires you to run the ADP first.

Also see 1.414(v)-1(d)(2)(iii)

excess contributions that are treated as catch-up contributions are still considered excess contributions. Therefore it is permitted to forfeit related match.

[Guest oxdougw]

If HCEs fail ADP, we've typically in the past recalc'd match and taken away any excess match prior to the ACP test. I guess we thought that was the way it was to be handled. Is that correct?

[Tom Poje]

Rate of match is determined AFTER corrections. see 1.401(a)(4)-4(e)(3)(iii)(G).

so what should take place:

Run ADP and ACP test

Make any necessary corrections for failed test(s)

Check for BRF issue.

Related match is never distributed but rather forfeited.

(Thank you for posting that question! I need to add that to my talk coming up for ASPA.)

[Guest oxdougw]

Thanks for clearing that up for me!