401(k) Contributions-Return prior to Year End

[BTH]

When there is an ADP test failure and excess contributions are returned, generally it is after the Plan Year ends, the correcting distributions are made and 1099's issued.

However, if it is determined that the ADP test will fail prior to the end of the year, but deferrals have already been made, is it possible to handle this in a different way? For instance, since the contributions could be returned before the end of the year, is it possible to return to funds to employer as a mistake-of-fact and thereby not have to issue a 1099? The funds would then be given to the HCE's and their W-2's adjusted accordingly. It seems "cleaner" for the HCE, but is something like this allowable or do you have use the actual excess contribution rules no matter when the money is refunded?

Thanks.

BTH

[ccassetty]

See 1.401(k)-1(f)(4), it says that the distributions satisfy the refund rules only if the refund is made after the end of the plan year.

I don't see why you would want to do this anyway. Seems a lot more messy to me.

Anyway, doing the test prior to year end has a fatal flaw, it's based on assumptions. If the assumptions are wrong, you come up with a different answer when the test is finally completed after the end of the year. What then? If you refunded too much, you have made a distribution without a distributable event. If you refunded too little, you still have to make a refund. Probably why the regs specifically prohibit it.

[Mike Preston]

I agree. The "solution", if there is one, is to do a test early enough in the year so that one can cut back the HCE's as far as future contributions go, and pass the test that way. Most plans allow the Plan Administrator to cut back HCE's in this manner on a uniform basis.

[Blinky the 3-eyed Fish]

The original post is not looking to correct a failure, but rather to avert the need for correction by taking back the deferrals and spewing a big "Oops, didn't mean to contribute that.". No, this is not a mistake of fact and not an available mechanism to alleviate your problem.