Testing failure of terminated HCE...

[Guest RONNIE WASEL]

Plan is a 401k plan with a fiscal year ending 8/31/03. We are in the process of completing the ADP/ACP testing so that corrective distribution can be made before deadline of November 15th. Plan has typically failed the ADP test in the past.

For this current plan year the plan has one HCE and it appears it will fail the ADP test and the HCE will need corrective distribution of around $2300.

Problem - HCE terminated shortly after the fiscal year end in September and rolled all monies out of the plan.

Possible solutions or is there anything that needs to be done?

Thanks,

Ronnie

[Tom Poje]

where were the monies rolled? if an IRA, then the $ are treated as an IRA contribution.

if another plan, the new plan should distribute the amount (adjsuted for earnings)

see examples on page 11.146 of the ERISA Outline Book, 2003 edition.

[ccassetty]

The plan will need to treat the distribution as two separate distributions. This will mean that when January rolls around, there will be two 1099R Forms. One will reflect the refund amount and the other will reflect the remaining distributable amount. If the participant did role the money to an IRA, then Tom's suggestion for the HCE to treat the amount as an IRA contribution would work. However, weather he/she decides to do this has no effect on the how the plan must handle the required refund. The participant will just have to determine if he/she is able to take the deduction for the IRA contribution since he/she was clearly a participant in a qualified plan. You should provide a letter to the rollover IRA/qualified plan provider that explains the situation so that the participant can withdraw the funds, if that is his/her preference, without being taxed twice on them.